Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002 or
------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number: 001-14901
---------
CONSOL Energy Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0337383
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1800 Washington Road, Pittsburgh, Pennsylvania 15241
-----------------------------------------------------------
(Address of principal executive offices including zip code)
(412) 831-4000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
-----
As of November 4, 2002, there were 78,748,367 shares of Common Stock, $.01 par
value, outstanding.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Consolidated Statements of Income (Loss) for the three months and nine
months ended September 30, 2002 and September 30, 2001 ........................... 1
Consolidated Balance Sheets at September 30, 2002 and December 31,
2001 ............................................................................. 2
Consolidated Statements of Stockholders' Equity for the nine months
ended September 30, 2002 ......................................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and September 30, 2001 ........................................ 5
Notes to Unaudited Consolidated Financial Statements ............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION .................................... 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................................ 42
ITEM 4. CONTROLS AND PROCEDURES .......................................................... 42
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................................ 43
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ........................................ 43
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................................................. 43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............................. 43
ITEM 5. OTHER INFORMATION ................................................................ 43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................................. 43
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Sales - Outside $ 506,901 $ 485,649 $ 1,494,175 $ 1,609,419
Sales - Related Parties 819 7,232
Freight - Outside 31,723 36,210 101,854 121,864
Freight - Related Parties 1 550 3,061
Other Income 7,748 12,548 31,649 45,851
------------ ------------ ------------ ------------
Total Revenue 546,373 534,407 1,629,047 1,787,427
Cost of Goods Sold and Other
Operating Charges 426,915 389,313 1,152,335 1,213,852
Freight Expense 31,724 36,210 102,404 124,925
Selling, General and Administrative
Expense 15,728 14,677 49,580 44,339
Depreciation, Depletion and
Amortization 65,248 58,622 197,506 182,171
Interest Expense 11,625 8,147 33,610 34,939
Taxes Other Than Income 37,780 42,103 131,372 122,398
Export Sales Excise Tax Resolution (669) (1,051) (1,706) (124,573)
------------ ------------ ------------ ------------
Total Costs 588,351 548,021 1,665,101 1,598,051
------------ ------------ ------------ ------------
Earnings (Loss) Before Income Taxes (41,978) (13,614) (36,054) 189,376
Income Tax Expense (Benefits) (34,992) (2,105) (43,596) 50,738
------------ ------------ ------------ ------------
Net Income (Loss) $ (6,986) $ (11,509) $ 7,542 $ 138,638
============ ============ ============ ============
Basic Earnings (Loss) Per Share $ (0.09) $ (0.15) $ 0.10 $ 1.76
============ ============ ============ ============
Dilutive Earnings (Loss) Per Share $ (0.09) $ (0.15) $ 0.10 $ 1.76
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding:
Basic 78,735,267 78,696,365 78,721,808 78,661,278
============ ============ ============ ============
Dilutive 78,770,328 78,913,117 78,856,972 78,973,697
============ ============ ============ ============
Dividends Paid Per Share $ 0.14 $ 0.28 $ 0.70 $ 0.84
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
1
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
- ------
Current Assets:
Cash and Cash Equivalents $ 12,040 $ 15,582
Accounts and Notes Receivable:
Trade 210,481 220,442
Other Receivables 127,302 123,347
Inventories 140,956 113,894
Deferred Income Taxes 57,876 54,708
Recoverable Income Taxes 113,860
Prepaid Expenses 35,538 42,274
---------- ----------
Total Current Assets 698,053 570,247
Property, Plant and Equipment:
Property, Plant and Equipment 5,676,935 5,413,960
Less - Accumulated Depreciation, Depletion
and Amortization 2,749,045 2,498,650
---------- ----------
Total Property, Plant and Equipment - Net 2,927,890 2,915,310
Other Assets:
Deferred Income Taxes 472,632 520,906
Advance Mining Royalties 88,774 92,644
Investment in Affiliates 130,422 77,667
Other 120,045 120,813
---------- ----------
Total Other Assets 811,873 812,030
---------- ----------
TOTAL ASSETS $4,437,816 $4,297,587
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
2
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts Payable $ 135,287 $ 171,923
Short-Term Notes Payable 296,955 77,869
Current Portion of Long-Term Debt 8,082 72,771
Accrued Income Tax 4,799
Other Accrued Liabilities 447,012 313,379
----------- -----------
Total Current Liabilities 887,336 640,741
Long-Term Debt:
Long-Term Debt 480,245 464,187
Capital Lease Obligations 4,348 8,482
----------- -----------
Total Long-Term Debt 484,593 472,669
Deferred Credits and Other Liabilities:
Postretirement Benefits Other Than Pensions 1,442,935 1,417,567
Pneumoconiosis Benefits 457,378 459,776
Mine Closing 332,572 333,738
Workers' Compensation 256,156 269,075
Deferred Revenue 199,722 227,595
Reclamation 4,908 13,744
Other 147,219 191,123
----------- -----------
Total Deferred Credits and Other Liabilities 2,840,890 2,912,618
Stockholders' Equity:
Common Stock, $.01 par value;
500,000,000 Shares Authorized, 80,267,558 Issued; and
78,748,367 Outstanding at September 30, 2002, and
78,705,638 Outstanding at December 31, 2001 803 803
Preferred Stock, 15,000,000 Shares Authorized;
None Issued and Outstanding
Capital in Excess of Par Value 643,785 643,627
Retained Earnings (Deficit) (365,126) (317,566)
Other Comprehensive Loss (37,302) (37,659)
Common Stock in Treasury, at Cost - 1,519,191 Shares
at September 30, 2002, and 1,561,920 Shares at December 31, 2001 (17,163) (17,646)
----------- -----------
Total Stockholders' Equity 224,997 271,559
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,437,816 $ 4,297,587
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
3
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Other Total
Capital in Retained Compre- Stock-
Common Excess of Earnings hensive Treasury holders'
Stock Par Value (Deficit) Loss Stock Equity
---------- ----------- ------------- ----------- ---------- ----------
Balance -
December 31, 2001 $ 803 $ 643,627 $ (317,566) $ (37,659) $ (17,646) $ 271,559
------------ ------------- -------------- ----------- ---------- ------------
(Unaudited)
Net Income 7,542 7,542
Treasury Rate Lock (net of $488 tax) 767 767
Interest Rate Swap Contract (Net of $261 tax) (410) (410)
------------ ------------- -------------- ----------- ---------- ------------
Comprehensive Income (Loss) 357 357
Treasury Stock Issued
(42,729 shares) 158 483 641
Dividends ($.70 per share) (55,102) (55,102)
------------ ------------- -------------- ----------- ---------- ------------
Balance -
September 30, 2002 $ 803 $ 643,785 $ (365,126) $ (37,302) $ (17,163) $ 224,997
============ ============= ============== =========== ========== ============
The accompanying notes are an integral part of these consolidated
financial statements.
4
CONSOL ENERGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
----------------------------
2002 2001
---------- ----------
Operating Activities:
Net Income $ 7,542 $ 138,638
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation, Depletion and Amortization 197,506 182,171
Gain on the Sale of Assets (5,617) (5,166)
Amortization of Advance Mining Royalties 7,212 14,217
Deferred Income Taxes 44,879 42,945
Equity in Earnings of Affiliates 5,736 (11,235)
Changes in Operating Assets:
Accounts and Notes Receivable 7,406 (84,422)
Inventories (27,062) 3,816
Prepaid Expenses 6,736 (14,152)
Changes in Other Assets 4,819 (15,121)
Changes in Operating Liabilities:
Accounts Payable (36,636) 33,167
Other Operating Liabilities 14,974 10,960
Changes in Other Liabilities (45,247) 30,880
Other (3,274) (44)
---------- ----------
171,432 188,016
---------- ----------
Net Cash Provided by Operating Activities 178,974 326,654
---------- ----------
Investing Activities:
Capital Expenditures (238,053) (163,521)
Additions to Advance Mining Royalties (3,342) (4,610)
Acquisition of Line Creek Mine Joint Venture (1,608)
Cash Received - Net of Acquisition Price - AEP 336,000
Acquisition of PGP and CSGC (158,157)
Investment in Equity Affiliates (58,491) (1,046)
Proceeds from Sales of Assets 7,148 (788)
---------- ----------
Net Cash (Used in) Provided by Investing Activities (292,738) 6,270
---------- ----------
Financing Activities:
Payments on Commercial Paper (26,893) (261,895)
Payments on Miscellaneous Borrowings (2,976) (4,066)
Payments on Long Term Notes (66,000)
Proceeds from Long Term Notes 260,246
Dividends Paid (55,070) (66,049)
Proceeds from Treasury Rate Lock 1,332
Payments for Bond Issuance Costs (1,026)
Issuance of Treasury Stock 609 1,510
---------- ----------
Net Cash Provided by (Used in) Financing Activities 110,222 (330,500)
---------- ----------
Net (Decrease)Increase in Cash and Cash Equivalents (3,542) 2,424
Cash and Cash Equivalents at Beginning of Period 15,582 10,570
---------- ----------
Cash and Cash Equivalents at End of Period $ 12,040 $ 12,994
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CONSOL ENERGY INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Dollars in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and nine-month periods
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for future periods.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all the footnotes
required by generally accepted accounting principles for complete financial
statements.
For further information, refer to the consolidated financial statements and
footnotes for the transitional period ended December 31, 2001 included in CONSOL
Energy Inc.'s (CONSOL Energy) Form 10-K for the transition period ended December
31, 2001, as amended.
In 2001, CONSOL Energy changed from a fiscal year ending June 30 to a fiscal
year ending December 31. CONSOL Energy's first full year ending December 31
started January 1, 2002 and ends December 31, 2002. CONSOL Energy made this
change in order to align its fiscal year with that of RWE A.G., which
beneficially owns directly or through subsidiaries approximately 74% of the
common stock of CONSOL Energy.
Certain reclassifications of the prior year's data have been made to conform to
the nine months ended September 30, 2002 classifications.
NOTE 2 - ACQUISITION:
On December 7, 2001, in order to expand its international market share, CONSOL
Energy purchased for $17,950 a 50% interest in the Glennies Creek Mine located
in New South Wales, Australia. Glennies Creek produces a high fluidity coking
coal that will be sold primarily to steel makers in the Asia-Pacific region. The
acquisition has been accounted for as a purchase, and accordingly, since the
date of acquisition the operating results of Glennies Creek Mine have been
included in CONSOL Energy's consolidated financial statements using the equity
method of accounting. Net income and earnings per share of CONSOL Energy, on a
pro forma basis, after giving effect to certain purchase accounting adjustments,
would not materially change from actual net income and earnings per share for
the three months or the nine months ended September 30, 2001.
6
On August 22, 2001, in order to expand existing gas operations, CONSOL Energy
purchased the remaining 50% interest in the coalbed methane reserves and the
remaining 25% interest in the production and pipeline gathering assets in
southwestern Virginia of Pocahontas Gas Partnership and Cardinal States
Gathering Company, respectively, for an aggregate of approximately $158,157.
Prior to the acquisition, CONSOL Energy owned 50% and 75%, respectively, of
these two entities. The acquisition has been accounted for as a purchase and,
accordingly, the operating results for the portion of Pocahontas Gas Partnership
and Cardinal States Gathering Company previously reported on the equity method
and the newly acquired portions have been included in CONSOL Energy's operating
results using full consolidation since the date of acquisition. The pro forma
results, assuming the acquisition of the interests in these entities had
occurred on January 1, 2001, are estimated to be:
Pro forma
------------------------------------------
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Revenues $ 542,275 $1,836,607
Net income (loss) $ (11,107) $ 145,043
Net income per common share:
Basic $ (0.14) $ 1.84
Dilutive $ (0.14) $ 1.84
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition of the interest in these entities had been completed
as of the beginning of the period presented, nor are they necessarily indicative
of future consolidated results.
On July 2, 2001, CONSOL Energy entered into agreements with American Electric
Power to supply coal to various American Electric Power coal-fired power plants.
CONSOL Energy purchased, for a nominal amount, the stock of Windsor Coal
Company, Southern Ohio Coal Company and Central Ohio Coal Company, subsidiaries
of American Electric Power which owns mines in Ohio and West Virginia. Under the
agreements, CONSOL Energy will supply approximately 34 million tons of coal
through 2008. These tons will be supplied by the former American Electric Power
affiliated mines and by other CONSOL Energy mines. The former American Electric
Power affiliated mines all had limited economically mineable reserves and have
all been depleted as of September 30, 2002. The mines ceased production on the
following dates:
Mine Company Mining Ceased
---- ------- -------------
Meigs 31 Southern Ohio Coal Company October 24, 2001
Muskingum Central Ohio Coal Company December 14, 2001
Meigs 2 Southern Ohio Coal Company March 6, 2002
Windsor Windsor Coal Company August 6, 2002
CONSOL Energy is expanding its McElroy and Robinson Run mines to meet the new
supply agreement requirements.
As part of this acquisition, CONSOL Energy assumed approximately $239,000 of
long-term liabilities related to employee and mine closure liabilities, as well
as other current liabilities.
7
American Electric Power paid CONSOL Energy $336,000 in cash. Subsequent to the
acquisition, the cash included as part of the acquisition was used by CONSOL
Energy to reduce a portion of its short-term debt. For income tax purposes, an
election was made to treat the stock acquisition as a purchase of assets. The
acquisition has been accounted for as a purchase and, accordingly, the operating
results of Windsor Coal Company, Southern Ohio Coal Company and Central Ohio
Coal Company have been included in CONSOL Energy's operating results since the
date of acquisition. The pro forma results, assuming the acquisition of the
interest in these entities had occurred on January 1, 2001, are estimated to be:
Pro forma
Nine Months Ended
September 30, 2001
--------------------
Revenues $ 1,946,236
Net income $ 144,279
Net income per common share:
Basic $ 1.83
Dilutive $ 1.83
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition of the interest in these entities had been completed
as of the beginning of the period presented, nor are they necessarily indicative
of future consolidated results.
NOTE 3 - INCOME TAXES:
The following is the reconciliation, stated as a percentage of pretax income of
the U.S. statutory federal income tax rate, to CONSOL Energy's effective tax
rate:
For the Three
Months Ended
-----------------------------------------------------------
September 30,
-----------------------------------------------------------
2002 2001
------------------------- -------------------------
Amount Percent Amount Percent
------------ ------------ ------------- -----------
Statutory U.S. federal income tax rate $ (14,692) 35.0% $ (4,765) 35.0%
Excess tax depletion (17,920) 42.7 2,465 (18.1)
Nonconventional fuel tax credit 402 (3.0)
Net effect of state tax (4,571) 10.9 (189) 1.4
Net effect of foreign tax 2,749 (6.5) (53) 0.4
Other (558) 1.3 35 (0.2)
--------- -------- --------- -------
Income Tax (Benefit) Expense
Effective Rate $ (34,992) 83.4% $ (2,105) 15.5%
========= ======== ========= =======
8
For the Nine
Months Ended
---------------------------------------------------------------
September 30,
---------------------------------------------------------------
2002 2001
--------------------------- ---------------------------
Amount Percent Amount Percent
------------- ------------ ------------- -----------
Statutory U. S. federal income tax rate $ (12,619) 35.0% $ 66,282 35.0%
Excess tax depletion (25,865) 71.7 (18,512) (9.8)
Nonconventional fuel tax credit (4,091) (2.2)
Net effect of state tax (3,344) 9.3 9,014 4.8
Net effect of foreign tax 4,039 (11.2) 332 0.2
Prior year tax settlement (1,908) 5.3
Other (3,899) 10.8 (2,287) (1.2)
--------- ------- ---------- --------
Income Tax (Benefit) Expense
Effective Rate $ (43,596) 120.9% $ 50,738 26.8%
========= ======= ========== ========
The provision for income taxes is adjusted at the time the returns are filed.
These adjustments, of which the federal portion is included in the Other line
above, decreased income tax expense by $1,460 for the three months and nine
months ended September 30, 2002. These adjustments decreased income tax expense
by $699 for the three months and nine months ended September 30, 2001,
respectively.
In the nine months ended September 30, 2002, CONSOL Energy received a $1,908
federal income tax benefit from a final agreement resolving disputed federal
income tax items for the years 1995 to 1997.
NOTE 4 - INVENTORIES:
The components of inventories consist of the following:
September 30, December 31,
2002 2001
----------------- ----------------
Coal $ 72,735 $ 33,897
Merchandise for resale 19,663 21,816
Supplies 48,558 58,181
--------------- -------------
Total Inventories $ 140,956 $ 113,894
=============== =============
9
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
CONSOL Energy has various purchase commitments for materials, supplies and items
of permanent investment incidental to the ordinary conduct of business. Such
commitments are not at prices in excess of current market values.
CONSOL Energy is subject to various lawsuits and claims with respect to such
matters as personal injury, wrongful death, damage to property, exposure to
hazardous substances, governmental regulations including environmental
remediation, employment and contract disputes, and other claims and actions
arising out of the normal course of business. CONSOL Energy provides for such
claims when available information indicates that it is probable that an asset
has been impaired or a liability has been incurred and the amount of the loss
can be reasonably estimated.
One of CONSOL Energy's subsidiaries, Fairmont Supply Company, which distributes
industrial supplies, currently is defending against approximately 21 thousand
asbestos claims in state courts in Pennsylvania, Ohio, West Virginia and
Mississippi. Because a very small percentage of products manufactured by third
parties and supplied by Fairmont in the past may have contained asbestos and
many of the pending claims are part of mass complaints filed by hundreds of
plaintiffs against a hundred or more defendants, it has been difficult for
Fairmont to determine how many of the cases actually involve valid claims or
plaintiffs who were actually exposed to asbestos-containing products supplied by
Fairmont. In addition, while Fairmont may be entitled to indemnity or
contribution in certain jurisdictions from manufacturers of identified products,
the availability of such indemnity or contribution is unclear at this time and,
in recent years, some of the manufacturers named as defendants in these actions
have sought protection from these claims under bankruptcy laws. Fairmont has no
insurance coverage with respect to these asbestos cases. To date, payments by
Fairmont with respect to asbestos cases have not been material. However, there
cannot be any assurance that payments in the future with respect to pending or
future asbestos cases will not be material to the financial position, results of
operations or cash flows of CONSOL Energy.
CONSOL Energy has recognized a liability related to a waste disposal site and
accrued $3,275 in Other Liabilities. CONSOL Energy cumulatively has paid $2,092
($183 and $541 were paid in the three months and nine months ended September 30,
2002, respectively) related to the remediation of this waste disposal site and,
accordingly, reduced the liability to $1,183.
In the opinion of management, the ultimate liabilities resulting from such
pending lawsuits and claims will not materially affect the financial position,
results of operations or cash flows of CONSOL Energy.
NOTE 6- SEGMENT INFORMATION:
CONSOL Energy has two reportable business segments: Coal and Gas. In the nine
months ended September 30, 2002, CONSOL Energy implemented a new internal
segment reporting method in order to align segment results to management's
assessment of profitability. As a result, the measure of segment profit or loss
has changed from Pre-tax Operating Income (Loss) to Earnings (Loss) Before
Income Taxes. Also, some corporate charges that were previously reflected in the
All Other segment are now reported as Corporate items and reflected in the
10
reconciliation between Segment Earnings (Loss) Before Income Tax to total
Earnings (Loss) Before Income Tax. CONSOL Energy has also changed its
disclosure from reporting additions to property, plant and equipment to
reporting capital expenditures for property, plant and equipment as shown
on the cash flow statement. Previously, additions to property, plant and
equipment included certain non-cash increases.
Historical segment data has been reclassified to conform with these
internal reporting changes.
Industry segment results for the three months ended September 30, 2002:
Reportable Business Segments
---------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
------------ ---------- ----------- ----------- -------------- ------------
Sales - outside $ 450,185 $ 37,842 $ 488,027 $ 18,874 $ $ 506,901
Freight - outside 31,723 31,723 31,723
Freight - related parties 1 1 1
Intersegment transfers 362 362 18,317 (18,679)
------------ ---------- ----------- ----------- -------------- ------------
Total Sales and Freight $ 481,909 $ 38,204 $ 520,113 $ 37,191 $ (18,679) $ 538,625
============ ========== =========== =========== ============== ============
Earnings (Loss) Before
Income Taxes (A) $ (32,846) $ 9,956 $ (22,890) $ (5,927) $ (13,161) $ (41,978)
============ ========== =========== =========== ============== ============
Segment assets (B) $ 2,925,707 $ 611,005 $ 3,536,712 $ 219,552 $ 681,552 $ 4,437,816
============ ========== =========== =========== ============== ============
Depreciation, depletion and
amortization $ 53,845 $ 8,607 $ 62,452 $ 2,796 $ $ 65,248
============ ========== =========== =========== ============== ============
Capital expenditures $ 76,373 $ 11,198 $ 87,571 $ 708 $ $ 88,279
============ ========== =========== =========== ============== ============
(A) Includes equity in earnings (loss) of unconsolidated equity
affiliates of ($1,846), ($845) and ($456) for Coal, Gas and All
Other, respectively.
(B) Includes investments in unconsolidated equity affiliates of
$88,878, $12,696 and $28,848 for Coal, Gas and All Other,
respectively. Also included in the Coal segment is $71,581 of
receivables related to the Export Sales Excise Tax Resolution that
was primarily recognized in the twelve months ended June 30, 2001.
11
Industry segment results for the three months ended September 30, 2001:
Reportable Business Segments
----------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
----------- --------- ----------- ----------- -------------- ------------
Sales - outside $ 444,778 $ 22,109 $ 466,887 $ 18,762 $ $ 485,649
Freight - outside 36,210 36,210 36,210
Intersegment transfers 449 449 20,907 (21,356)
----------- --------- ----------- ----------- --------------- ------------
Total Sales and Freight $ 480,988 $ 22,558 $ 503,546 $ 39,669 $ (21,356) $ 521,859
=========== ========= =========== =========== =============== ============
Earnings (Loss) Before
Income Taxes (C) $ (6,512) $ 4,133 $ (2,379) $ (3,746) $ (7,489) $ (13,614)
=========== ========= =========== =========== ============== ============
Segment assets (D) $ 2,939,479 $ 578,090 $ 3,517,569 $ 159,882 $ 543,767 $ 4,221,218
=========== ========= =========== =========== ============== ============
Depreciation, depletion and
amortization $ 51,564 $ 4,700 $ 56,264 $ 2,358 $ $ 58,622
=========== ========= =========== =========== ============== ============
Capital expenditures(E) $ 50,553 $ 165,522 $ 216,075 $ 767 $ $ 216,842
=========== ========= =========== =========== ============== ============
(C) Includes equity in earnings (loss) of unconsolidated affiliates of
($402), $1,333 and ($149) for Coal, Gas and Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $44,519,
$6,900 and $698 for Coal, Gas and All Other, respectively. Also
included in the Coal segment is $82,161 of receivables related to the
Export Sales Excise Tax Resolution. Also, included in the Gas segment
is $391,305 attributable to the purchase from Conoco Inc. of the
remaining 50% interest in the assets of Pocahontas Gas Partnership and
the remaining 25% interest in the assets of Cardinal States Gathering
Company. The assets owned by these two entities are fully consolidated
at and from the acquisition date, and previously were accounted for on
the equity method.
(E) The Gas segment includes $158,157 of expenditures related to the
acquisition of the remaining 50% interest in the assets of Pocahontas
Gas Partnership and the remaining 25% interest in the assets of
Cardinal States Gathering Company.
12
Industry segment results for the nine months ended September 30, 2002:
Reportable Business Segments
--------------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
----------- --------- ----------- ----------- -------------- ------------
Sales - outside $ 1,332,717 $ 100,554 $ 1,433,271 $ 60,904 $ $ 1,494,175
Sales - related parties 819 819 819
Freight - outside 101,724 101,724 130 101,854
Freight - related parties 550 550 550
Intersegment transfers 1,350 1,350 66,458 (67,808)
----------- --------- ----------- ----------- -------------- ------------
Total Sales and Freight $ 1,435,810 $ 101,904 $ 1,537,714 $ 127,492 $ (67,808) $ 1,597,398
=========== ========= =========== =========== ============== ============
Earnings (Loss) Before
Income Taxes (F) $ (7,081) $ 21,793 $ 14,712 $ (14,041) $ (36,725) $ (36,054)
=========== ========= =========== =========== ============== ============
Segment assets (G) $ 2,925,707 $ 611,005 $ 3,536,712 $ 219,552 $ 681,552 $ 4,437,816
=========== ========= =========== =========== ============== ============
Depreciation, depletion and
amortization $ 164,554 $ 25,366 $ 189,920 $ 7,586 $ $ 197,506
=========== ========= =========== =========== ============== ============
Capital expenditures $ 192,525 $ 41,261 $ 233,786 $ 4,267 $ $ 238,053
=========== ========= =========== =========== ============== ============
(F) Includes equity in earnings (loss) of unconsolidated equity affiliates
of ($3,104), ($1,775) and ($857) for Coal, Gas and All Other,
respectively.
(G) Includes investments in unconsolidated equity affiliates of $88,878,
$12,696 and $28,848 for Coal, Gas and All Other, respectively. Also
included in the Coal segment is $71,581 of receivables related to the
Export Sales Excise Tax Resolution.
13
Industry segment results for the nine months ended September 30, 2001:
Reportable Business Segments
---------------------------------------------
Corporate,
All Adjustments
Coal Gas Total Other & Eliminations Consolidated
-------------- ------------ ------------- ------------ -------------- ---------------
Sales - outside $ 1,434,022 $ 96,340 $ 1,530,362 $ 79,057 $ $ 1,609,419
Sales - related parties 7,232 7,232 7,232
Freight - outside 121,757 121,757 107 121,864
Freight - related parties 3,061 3,061 3,061
Intersegment transfers 2,284 2,284 71,576 (73,860)
-------------- ------------ ------------- ------------ ----------- ------------
Total Sales and Freight $ 1,566,072 $ 98,624 $ 1,664,696 $ 150,740 $ (73,860) $ 1,741,576
============== ============ ============= ============ =========== ============
Earnings (Loss) Before
Income Taxes (H) $ 167,958 $ 52,014 $ 219,972 $ (10,482) $ (20,114) $ 189,376
============== ============ ============= ============ =========== ============
Segment assets (I) $ 2,939,479 $ 578,090 $ 3,517,569 $ 159,882 $ 543,767 $ 4,221,218
============== ============ ============= ============ =========== ============
Depreciation, depletion and
amortization $ 163,377 $ 11,573 $ 174,950 $ 7,221 $ $ 182,171
============== ============ ============= ============ =========== ============
Capital expenditures (J) $ 130,561 $ 186,270 $ 316,831 $ 4,847 $ $ 321,678
============== ============ ============= ============ =========== ============
(H) Includes equity in earnings (loss) of unconsolidated affiliates of
($658), $13,577 and ($1,684) for Coal, Gas and All Other,
respectively.
(I) Includes investments in unconsolidated equity affiliates of
$44,519, $6,900 and $698 for Coal, Gas and All Other,
respectively. Also included in the Coal segment is $82,161 of
receivables related to the Export Sales Excise Tax resolution.
Also, included in the Gas segment is $391,305 attributable to the
purchase from Conoco Inc. of the remaining 50% interest in the
assets of Pocahontas Gas Partnership and the remaining 25%
interest in the assets of Cardinal States Gathering Company. The
assets owned by these two entities are fully consolidated at and
from the acquisition date, and previously were accounted for on
the equity method.
(J) The Gas segment includes $158,157 of expenditures related to the
acquisition of the remaining 50% interest in the assets of
Pocahontas Gas Partnership and the remaining 25% interest in the
assets of Cardinal States Gathering Company.
14
Reconciliation of Segment Information to Consolidated Amounts
Earnings (Loss) Before Income Taxes:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
----------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- --------- ---------
Segment earnings (loss) before income taxes
for total reportable business segments $ (22,890) $ (2,379) $ 14,712 $ 219,972
Segment (loss) before income taxes
for all other businessses (5,927) (3,746) (14,041) (10,482)
Incentive compensation (90) (690) (3,468) (17,596)
Interest income (expense), net
and other non-operating activity (13,071) (6,799) (33,257) (2,518)
----------- ----------- --------- ---------
Earnings (Loss) Before Income Taxes (41,978) $ (13,614) $ (36,054) $ 189,376
=========== =========== ========= =========
Total Assets:
September 30,
-----------------------------
2002 2001
----------- -----------
Segment assets for total reportable
business segments $ 3,536,712 $ 3,517,569
Segment assets for all other businesses 219,552 159,882
Items excluded from segment assets:
Cash and other investments 12,403 13,421
Export sales excise tax resolution
interest receivable 22,345 33,657
Deferred tax assets 530,508 496,689
Recoverable income taxes 113,860
Bond issuance costs 2,436
----------- -----------
Total Consolidated Assets $ 4,437,816 $ 4,221,218
=========== ===========
NOTE 7 - GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:
The payment obligations under the $250,000 7.875 percent Notes due 2012 issued
by CONSOL Energy are fully and unconditionally guaranteed by several
subsidiaries of CONSOL Energy. In accordance with positions established by the
Securities and Exchange Commission, the following financial information sets
forth separate financial information with respect to the parent, the guarantor
subsidiaries and the non-guarantor subsidiaries. The principal elimination
entries eliminate investments in subsidiaries and certain intercompany balances
and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage
several assets and liabilities of their subsidiaries. For example, these include
deferred tax assets, cash and other post-employment liabilities. These assets
and liabilities are reflected as parent company or guarantor company amounts for
purposes of this presentation.
15
Income Statement for Three Months Ended September 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
------------ ------------- ------------- ------------- --------------
Sales - Outside $ $ 435,232 $ 71,669 $ $ 506,901
Sales - Related Parties
Freight - Outside 24,844 6,879 31,723
Freight - Related Parties 1 1
Other Income (including equity earnings) (1,931) 24,423 (22,131) 7,387 7,748
--------- --------- --------- --------- ---------
Total Revenue (1,931) 484,500 56,417 7,387 546,373
Cost of Goods Sold and Other
Operating Charges 2,530 399,386 64,599 (39,600) 426,915
Intercompany Activity (2,695) (18,906) (21,817) 43,418
Freight Expense 24,845 6,879 31,724
Selling, General and Administrative Expense 13,836 1,892 15,728
Depreciation, Depletion and Amortization 795 54,815 9,640 (2) 65,248
Interest Expense 6,874 3,895 856 11,625
Taxes Other Than Income 905 31,931 4,944 37,780
Export Sales Excise Tax Resolution (669) (669)
--------- --------- --------- --------- ---------
Total Costs 8,409 509,133 66,993 3,816 588,351
--------- --------- --------- --------- ---------
Earnings (Loss) Before Income Taxes (10,340) (24,633) (10,576) 3,571 (41,978)
Income Taxes (Benefit) (3,354) (25,982) (5,656) (34,992)
--------- --------- --------- --------- ---------
Net Income (Loss) $ (6,986) $ 1,349 $ (4,920) $ 3,571 $ (6,986)
========= ========= ========= ========= =========
16
Balance Sheet for September 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Total
---------- ------------- ------------- ------------- ---------
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,286 $ 87 $ 8,667 $ $ 12,040
Accounts and Notes Receivable:
Trade 65,417 121,458 23,606 210,481
Other 1,970 109,164 16,168 127,302
Inventories 174 131,277 9,505 140,956
Deferred Income Taxes 57,876 57,876
Recoverable Income Taxes 113,860 113,860
Prepaid Expenses 12,041 21,884 1,613 35,538
----------- ----------- ----------- ----------- -----------
Total Current Assets 254,624 383,870 59,559 698,053
Property, Plant and Equipment:
Property, Plant and Equipment 83,688 4,600,289 992,958 5,676,935
Less-Accumulated Depreciation,
Depletion and Amortization 40,588 2,644,703 63,754 2,749,045
----------- ----------- ----------- ----------- -----------
Property, Plant and Equipment - Net 43,100 1,955,586 929,204 2,927,890
Other Assets:
Deferred Income Taxes 472,632 472,632
Advanced Mining Royalties 49,799 38,975 88,774
Investment in Affiliates 1,347,570 1,204,345 62,184 (2,483,677) 130,422
Other 489 78,399 41,157 120,045
----------- ----------- ----------- ----------- -----------
Total Other Assets 1,820,691 1,332,543 142,316 (2,483,677) 811,873
----------- ----------- ----------- ----------- -----------
Total Assets $ 2,118,415 $ 3,671,999 $ 1,131,079 $(2,483,677) $ 4,437,816
=========== =========== =========== =========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 42,104 $ 63,064 $ 30,119 $ $ 135,287
Accounts Payable (Recoverable)-
Related Parties 1,173,467 (813,493) (359,974)
Short-Term Notes Payable 296,955 296,955
Current Portion of Long-Term Debt 99 7,347 636 8,082
Other Accrued Liabilities 35,546 343,953 67,513 447,012
----------- ----------- ----------- ----------- -----------
Total Current Liabilities 1,548,171 (399,129) (261,706) 887,336
Long-Term Debt:
Long-Term Debt 248,050 211,655 20,540 480,245
Capital Lease Obligations 4,348 4,348
----------- ----------- ----------- ----------- -----------
Total Long-Term Debt 248,050 216,003 20,540 484,593
Deferred Credits and Other Liabilities:
Postretirement Benefits Other
Than Pensions 1,442,935 1,442,935
Pneumoconiosis Benefits 457,378 457,378
Mine Closing 200,969 131,603 332,572
Workers' Compensation 2,844 225,607 27,705 256,156
Deferred Revenue 179,272 20,450 199,722
Reclamation 2,873 2,035 4,908
Other 94,353 34,149 18,717 147,219
----------- ----------- ----------- ----------- -----------
Total Deferred Credits and Other
Liabilities 97,197 2,543,183 200,510 2,840,890
Stockholders' Equity 224,997 1,311,942 1,171,735 (2,483,677) 224,997
----------- ----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ 2,118,415 $ 3,671,999 $ 1,131,079 $(2,483,677) $ 4,437,816
=========== =========== =========== =========== ===========
17
Condensed Statement of Cash Flows
For the Three Months Ended September 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
---------- ------------- ------------- ------------- --------------
Net Cash Provided
by Operating Activities $ 18,510 $ 66,449 $ 18,479 $ $ 103,438
--------- --------- --------- ---------- ---------
Cash Flows from Investing Activities:
Capital Expenditures $ (4,298) $ (69,221) $ (14,760) $ $ (88,279)
Investment in Equity Affiliates (8,811) (14,953) (23,764)
Other Investing Activities 3,745 (572) 3,173
--------- --------- --------- ---------- ---------
Net Cash Used in Investing Activities $ (13,109) $ (65,476) $ (30,285) $ $(108,870)
--------- --------- --------- ---------- ---------
Cash Flows from Financing Activities:
Proceeds from Short-Term Borrowings $ 5,185 $ $ $ $ 5,185
Proceeds from Long-Term Notes 13,936 13,936
Dividends Paid (11,016) (11,016)
Other Financing Activities 156 (1,001) (2) (847)
--------- --------- --------- ---------- ---------
Net Cash (Used in) Provided by
Financing Activities $ (5,675) $ (1,001) $ 13,934 $ $ 7,258
--------- --------- --------- ---------- ---------
Income Statement for Three Months Ended September 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
---------- ------------- ------------- ------------- -------------
Sales - Outside $ $ 309,617 $ 176,032 $ $ 485,649
Sales - Related Parties 1 (1)
Freight - Outside 20,449 15,761 36,210
Freight - Related Parties 379 (379)
Other Income (including equity earnings) 3,792 50,954 (18,964) (23,234) 12,548
--------- --------- --------- -------- ---------
Total Revenue 3,792 381,021 173,207 (23,613) 534,407
Cost of Goods Sold and Other
Operating Charges 3,165 321,021 93,676 (28,549) 389,313
Intercompany Activity 12,227 (42,072) 1,736 28,109
Freight Expense 20,449 16,140 (379) 36,210
Selling, General and
Administrative Expense 10,378 4,299 14,677
Depreciation, Depletion and
Amortization 554 45,371 12,698 (1) 58,622
Interest Expense 1,105 6,194 848 8,147
Taxes Other Than Income 1,065 30,156 10,882 42,103
Export Sales Excise Tax Resolution (971) (80) (1,051)
--------- --------- --------- -------- ---------
Total Costs 18,116 390,526 140,199 (820) 548,021
--------- --------- --------- -------- ---------
Earnings (Loss) Before Income Taxes (14,324) (9,505) 33,008 (22,793) (13,614)
Income Taxes (Benefit) (2,815) (7,440) 8,150 (2,105)
--------- --------- --------- -------- ---------
Net Income (Loss) $ (11,509) $ (2,065) $ 24,858 $(22,793) $ (11,509)
========= ========= ========= ======== =========
18
Balance Sheet for December 31, 2001;
Non-
Parent Guarantor Guarantor Elimination Total
------------- ------------- ------------- ------------- -------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,723 $ 158 $ 11,701 $ $ 15,582
Accounts and Notes Receivable:
Trade 204,520 59,331 (43,409) 220,442
Other 1,577 108,784 12,986 123,347
Inventories 240 83,668 29,986 113,894
Deferred Income Taxes 54,708 54,708
Prepaid Expenses 3,142 30,667 8,465 42,274
------------- ------------- ------------- ------------- -------------
Total Current Assets 63,390 427,797 122,469 (43,409) 570,247
Property, Plant and Equipment:
Property, Plant and Equipment 51,581 4,055,229 1,307,150 5,413,960
Less-Accumulated Depreciation,
Depletion and Amortization 20,737 2,074,162 403,751 2,498,650
------------- ------------- ------------- ------------- -------------
Property, Plant and Equipment - Net 30,844 1,981,067 903,399 2,915,310
Other Assets:
Deferred Income Taxes 520,906 520,906
Advanced Mining Royalties 9 52,966 39,669 92,644
Investment in Affiliates 1,113,721 951,651 51,236 (2,038,941) 77,667
Other 754 74,451 45,608 120,813
------------- ------------- ------------- ------------- -------------
Total Other Assets 1,635,390 1,079,068 136,513 (2,038,941) 812,030
------------- ------------- ------------- ------------- -------------
Total Assets $ 1,729,624 $ 3,487,932 $ 1,162,381 $ (2,082,350) $ 4,297,587
============= ============= ============= ============= =============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 117,281 $ 6,139 $ 91,912 $ (43,409) $ 171,923
Accounts Payable (Recoverable)-
Related Parties 811,479 (374,435) (517,919) 80,875
Short-Term Notes Payable 77,869 77,869
Current Portion of Long-Term Debt 100 72,036 635 72,771
Accrued Income Taxes 4,799 4,799
Other Accrued Liabilities 31,753 208,637 72,989 313,379
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 1,043,281 (87,623) (352,383) 37,466 640,741
Long-Term Debt:
Long-Term Debt 245,892 211,688 6,607 464,187
Capital Lease Obligations 8,482 8,482
------------- ------------- ------------- ------------- -------------
Total Long-Term Debt 245,892 220,170 6,607 472,669
Deferred Credits and Other Liabilities:
Postretirement Benefits Other
Than Pensions 1,417,567 1,417,567
Pneumoconiosis Benefits 459,776 459,776
Mine Closing 198,700 135,038 333,738
Workers' Compensation 1,738 234,814 32,523 269,075
Deferred Revenue 195,370 32,225 227,595
Reclamation 7,715 6,029 13,744
Other 167,154 21,649 2,320 191,123
------------- ------------- ------------- ------------- -------------
Total Deferred Credits and Other
Liabilities 168,892 2,535,591 208,135 2,912,618
Stockholders' Equity 271,559 819,794 1,300,022 (2,119,816) 271,559
------------- ------------- ------------- ------------- -------------
Total Liabilities and Stockholders' Equity $ 1,729,624 $ 3,487,932 $ 1,162,381 $ (2,082,350) $ 4,297,587
============= ============= ============= ============= =============
19
Condensed Statement of Cash Flows
For the Three Months Ended September 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
------------- ------------- ------------- -------------- -------------
Net Cash Provided by (Used in)
Operating Activities $ 189,206 $ 41,916 $ (158,584) $ $ 72,538
------------ ------------- ------------- ------------- ------------
Cash Flows from Investing Activities:
Capital Expenditures $ (6,012) $ (41,222) $ (11,451) $ $ (58,685)
Cash Received - Net of
Acquisition Price - AEP 336,000 336,000
Acquisition of PGP and CSGC (158,157) (158,157)
Investment in Equity Affiliates (1,473) (150) (8,804) (10,427)
Other Investing Activities 3 255 (313) (55)
----------- ----------- ------------- ----------- ------------
Net Cash (Used in) Provided by
Investing Activities $ (7,482) $ (41,117) $ 157,275 $ $ 108,676
----------- ----------- ------------- ----------- ------------
Cash Flows from Financing Activities:
Payments on Short-Term Borrowings $ (162,018) $ $ $ $ (162,018)
Dividends Paid (22,025) (22,025)
Other Financing Activities 1 (803) (802)
----------- ------------ ------------ ----------- ------------
Net Cash Used in Financing Activities (184,042) $ (803) $ $ $ (184,845)
----------- ----------- ------------ ----------- -------------
Income Statement for the Nine Months Ended September 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
------------- ------------- --------------- -------------- ---------------
Sales - Outside $ $ 1,272,282 $ 221,893 $ $ 1,494,175
Sales - Related Parties 819 819
Freight - Outside 80,214 21,640 101,854
Freight - Related Parties 550 1,265 (1,265) 550
Other Income (including equity earnings) 24,386 23,619 (484) (15,872) 31,649
----------- ----------- ----------- ---------- -----------
Total Revenue 24,386 1,377,484 244,314 (17,137) 1,629,047
Cost of Goods Sold and Other
Operating Charges 11,063 1,065,000 195,107 (118,835) 1,152,335
Intercompany Activity (6,420) (73,494) (55,159) 135,073
Freight Expense 80,764 22,905 (1,265) 102,404
Selling, General and
Administrative Expense 39,107 10,473 49,580
Depreciation, Depletion and
Amortization 1,636 169,138 28,589 (1,857) 197,506
Interest Expense 16,953 14,387 2,270 33,610
Taxes Other Than Income 2,928 110,286 18,158 131,372
Export Sales Excise Tax Resolution (1,706) (1,706)
----------- ----------- ----------- ---------- -----------
Total Costs 26,160 1,403,482 222,343 13,116 1,665,101
----------- ----------- ----------- ---------- -----------
Earnings (Loss) Before Income Taxes (1,774) (25,998) 21,971 (30,253) (36,054)
Income Taxes (Benefit) (9,316) (36,105) 1,825 (43,596)
----------- ----------- ----------- ---------- -----------
Net Income (Loss) $ 7,542 $ 10,107 $ 20,146 $ (30,253) $ 7,542
=========== =========== =========== ========== ===========
20
Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2002;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Net Cash (Used in) Provided
by Operating Activities $ (125,980) $ 240,738 $ 64,216 $ $ 178,974
----------- ----------- ----------- ----------- ------------
Cash Flows from Investing Activities:
Capital Expenditures $ (10,824) $ (176,186) $ (51,043) $ $ (238,053)
Investment in Equity Affiliates (28,795) (50) (29,646) (58,491)
Other Investing Activities 4,301 (495) $ 3,806
----------- ----------- ----------- ----------- ------------
Net Cash Used in Investing Activities $ (39,619) $ (171,935) $ (81,184) $ $ (292,738)
----------- ----------- ----------- ----------- ------------
Cash Flows from Financing Activities:
Payments on Short-Term Borrowings $ (26,893) $ $ $ $ (26,893)
Payments on Long-Term Notes (66,000) (66,000)
Proceeds from Long-Term Notes 246,310 13,936 260,246
Dividends Paid (55,070) (55,070)
Other Financing Activities 815 (2,874) (2) (2,061)
----------- ----------- ----------- ----------- ------------
Net Cash Provided by (Used in)
Financing Activities $ 165,162 $ (68,874) $ 13,934 $ $ 110,222
----------- ----------- ----------- ----------- ------------
Income Statement for the Nine Months Ended September 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
----------- ----------- ----------- ----------- ------------
Sales - Outside $ $ 1,140,055 $ 469,364 $ $ 1,609,419
Sales - Related Parties 3,101 4,131 7,232
Freight - Outside 56,211 65,653 121,864
Freight - Related Parties 970 3,117 (1,026) 3,061
Other Income (including equity earnings) 168,589 152,254 (75,702) (199,290) 45,851
----------- ----------- ----------- ----------- ------------
Total Revenue 168,589 1,352,591 466,563 (200,316) 1,787,427
Cost of Goods Sold and Other
Operating Charges 30,042 1,051,877 228,682 (96,749) 1,213,852
Intercompany Activity (11,602) (102,156) 12,913 100,845
Freight Expense 57,181 68,770 (1,026) 124,925
Selling, General and
Administrative Expense 34,346 9,993 44,339
Depreciation, Depletion and
Amortization 1,505 142,130 40,392 (1,856) 182,171
Interest Expense 18,170 13,842 2,927 34,939
Taxes Other Than Income 3,601 116,837 1,960 122,398
Export Sales Excise Tax Resolution (116,857) (7,716) (124,573)
----------- ----------- ----------- ----------- ------------
Total Costs 41,716 1,197,200 357,921 1,214 1,598,051
----------- ----------- ----------- ----------- ------------
Earnings (Loss) Before Income Taxes 126,873 155,391 108,642 (201,530) 189,376
Income Taxes (Benefit) (11,765) 33,023 29,480 50,738
----------- ----------- ----------- ----------- ------------
Net Income (Loss) $ 138,638 $ 122,368 $ 79,162 $ (201,530) $ 138,638
=========== =========== =========== =========== ============
21
Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 2001;
Non-
Parent Guarantor Guarantor Elimination Consolidated
------------- ------------- --------------- ------------- ----------------
Net Cash (Used in) Provided
by Operating Activities $ (126,538) $ 567,745 $ (114,553) $ $ 326,654
------------- ------------- --------------- ------------- ---------------
Cash Flows from Investing Activities:
Capital Expenditures $ (9,175) $ (115,513) $ (38,833) $ $ (163,521)
Acquisition of Line Creek Mine
Joint Venture (1,608) (1,608)
Cash Received - Net of
Acquisition Price - AEP 336,000 336,000
Acquisition of PGP and CSGC (158,157) (158,157)
Investment in Equity Affiliates (1,473) 11,036 (10,609) (1,046)
Other Investing Activities 1,428 3,131 (9,957) (5,398)
------------- ------------- --------------- ------------- ---------------
Net Cash (Used in) Provided
by Investing Activities $ (9,220) $ (101,346) $ 116,836 $ $ 6,270
------------- ------------- --------------- ------------- ---------------
Cash Flows from Financing Activities:
Proceeds from (Payments on)
Short-Term Borrownings $ 200,794 $ (462,689) $ $ $ (261,895)
Dividends Paid (66,049) (66,049)
Other Financing Activities 1,410 (3,966) (2,556)
------------- ------------- --------------- ------------- ---------------
Net Cash Provided by (Used in)
Financing Activities $ 136,155 $ (466,655) $ $ $ (330,500)
------------- ------------- --------------- ------------- ---------------
NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS:
On August 17, 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued and will be effective
for CONSOL Energy in the first quarter of the year ending December 31, 2003. The
new rule requires the fair value of a liability for an asset retirement
obligation to be recognized in the period in which it is incurred. When the
liability is initially recorded, a cost is capitalized by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. To settle the liability,
the obligation for the recorded amount is paid, and to the extent of the
difference in liability to cash paid, a gain or loss upon settlement is
incurred. Management is analyzing this requirement to determine its effect on
CONSOL Energy's financial statements.
In July 2001, Statement of Financial Accounting Standards No. 144, "Impairment
or Disposal of Long-Lived Assets," was issued and will be effective for CONSOL
Energy in the first quarter of the year ending December 31, 2003. The provisions
of this statement provide a single accounting model for impairment of long-lived
assets. No material effect from this adoption is anticipated.
In June, 2002, Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" (SFAS No. 146) was issued
and will be effective for CONSOL Energy for any exit or disposal activities that
are initiated after December 31, 2002.
22
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities. The scope of SFAS
No. 146 includes (1) costs to terminate contracts that are not capital leases;
(2) costs to consolidate facilities or relocate employees; and (3) termination
benefits provided to employees who are involuntarily terminated under the terms
of a one-term benefits arrangements that is not an ongoing benefit arrangement
or an individual deferred-compensation contract. No material effect from this
adoption is anticipated.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
General
Total coal sales, including our portion of sales by equity affiliates, for the
three months ended September 30, 2002 were 16.9 million tons. These tons include
16.3 million tons that were produced by CONSOL Energy operations, by our equity
affiliates or sold from inventory. This compares with total coal sales,
including our portion of sales by equity affiliates, of 18.0 million tons for
the three months ended September 30, 2001. These tons include 17.4 million tons
that were produced by CONSOL Energy operations, by our equity affiliates or sold
from inventory. Demand for coal in the three months ended September 30, 2002,
was weak primarily due to the continued sluggish U. S. economy, and the
lingering effect of higher than normal customer inventory levels as a result of
the very mild winter. The decrease in tons sold was also due to the deferral of
shipments by some of our customers from the third quarter of 2002 and reduced
volumes from requirement contracts. Our inventory of company produced coal,
including our portion of inventory at equity affiliates, was 3.2 million tons at
September 30, 2002 compared with 1.6 million tons at December 31, 2001. Average
sales prices for company produced coal have increased 9.0% to $27.23 per ton in
the 2002 period from $24.99 per ton in the 2001 period reflecting the higher
prices negotiated in a more favorable coal market in the last quarter of 2001.
Production from CONSOL Energy operations, including a percentage of the
production of equity affiliates equal to our interest in these affiliates, was
13.7 million tons during the three months ended September 30, 2002 and 17.1
million tons for the three months ended September 30, 2001. Lower production
levels during the quarter were the result of the previously announced plan to
reduce production by seven to eight million tons from planned output during 2002
in order to match anticipated demand. The following mines have been idled to
implement reductions to production from planned output:
Mine Date Idled Date Production Resumed
---- ------------ -----------------------
McElroy May 1, 2002 August 5, 2002
Blacksville #2 June 17, 2002 July 17, 2002
Robinson Run June 17, 2002 July 18, 2002
Mine 84 June 17, 2002 July 22, 2002
Mahoning Valley June 17, 2002 Anticipated to remain idle
until market conditions
support reopening.
Humphrey June 17, 2002 August 13, 2002
VP#8 June 17, 2002 July 15, 2002
Shoemaker June 24, 2002 August 26, 2002
Rend Lake July 8, 2002 Anticipated to remain idle
until market conditions
support reopening
Loveridge May 28, 2001 Anticipated to remain idle
until market conditions
support reopening.
24
The Humphrey and Dilworth mines will close permanently later this year.
Sales volumes of coalbed methane gas, including a percentage of the sales of
equity affiliates equal to our interest in these affiliates, increased 25.7% to
11.8 billion cubic feet in the three months ended September 30, 2002 compared
with 9.4 billion cubic feet in the three months ended September 30, 2001. The
increased sales volumes are primarily due to the acquisition of the remaining
50% interest in Pocahontas Gas Partnership on August 22, 2001. Our average sales
price for coalbed methane gas, including sales of equity affiliates, increased
11.8% to $3.32 per million British thermal units in the 2002 period compared
with $2.97 per million British thermal units in the 2001 period. The increase in
gas price in the three months ended September 30, 2002 compared to the three
months ended September 30, 2001 was due primarily to warmer summer temperatures
and concerns about longer term shortfalls in North American gas production.
CONSOL Energy Board of Directors appointed PricewaterhouseCoopers LLP to serve
as the company's independent accountant, effective June 5, 2002.
PricewaterhouseCoopers LLP serves as the independent accountant for RWE A.G., a
multi-utility holding group headquartered in Essen, Germany, which owns
approximately 74 percent of CONSOL Energy's common stock. PricewaterhouseCoopers
LLP replaced Ernst & Young LLP as the company's independent accountant.
In March 2002, our 50% joint venture with Allegheny Energy Supply Company, LLC,
an affiliate of one of our largest coal customers, completed an 88-megawatt,
gas-fired electric generating facility and the facility was placed into
commercial service on June 25, 2002. The facility has operated for 31,186
megawatt hours and was neutral to earnings in the three months ended September
30, 2002.
On July 15, 2002, Standard & Poor's revised its outlook on CONSOL Energy to
negative from stable based on poor coal industry conditions. Standard & Poor's
said that it has affirmed its triple-B plus and A-2 corporate credit ratings.
On August 2, 2002, Moody's Investor Service downgraded the senior unsecured debt
ratings of CONSOL Energy from Baa1 to Baa2. The rating outlook was changed from
stable to negative.
Results of Operations
Three Months Ended September 30, 2002 Compared with Three Months
Ended September 30, 2001
Net Income
CONSOL Energy reported a net loss of $7 million for the three months ended
September 30, 2002 compared to a net loss of $12 million for the three months
ended September 30, 2001. The change of $5 million primarily was due to
increased income tax benefits, gas sales revenues and coal sales revenues. These
increases were offset, in part, by increased cost of goods sold and other
charges and increased depreciation, depletion and amortization. Income tax
benefits increased in the 2002 period due mainly to the reduction in pre-tax
income without a comparable reduction in percentage depletion tax benefits. Gas
revenues increased in the 2002 period compared to the 2001 period due mainly to
a 47.9% increase in sales volumes and a
25
14.5% increase in average sales price per million British thermal units sold.
Company produced coal sales revenue increased in this period due mainly to an
8.9% increase in the price per ton of coal sold, offset, in part, by a 6.5%
decrease in volume sold. These increases were offset, in part, by increased cost
of goods sold and other charges due primarily to the increased cost per ton of
company produced coal and additional closed and idle mine costs in the 2002
period. Depreciation, depletion and amortization also increased due mainly to
the acquisition of the remaining 50% interest in Pocahontas Gas Partnership and
the remaining 25% interest in the Cardinal States Gathering Company and
additional assets being placed in service in the 2002 period.
Revenue
Sales increased $21 million, or 4.4%, to $507 million for the 2002 period from
$486 million for the 2001 period.
Revenues from the sales of gas increased 57.5%, or $14 million, to $38 million
in the 2002 period compared to $24 million in the 2001 period. Sales volumes
were 11.7 billion cubic feet in the 2002 period, an increase of 3.8 billion
cubic feet, or 47.9%, from the 2001 period. The increase was due primarily to
the August 22, 2001 acquisition of the remaining 50% interest in Pocahontas Gas
Partnership. Average sales price per million British thermal units sold was
$3.32 in the 2002 period compared to $2.90 in the 2001 period. The increase in
gas price in the three months ended September 30, 2002 compared to the three
months ended September 30, 2001 was due primarily to warmer summer temperatures
and customer concerns about longer term shortfalls in North American gas
production.
Revenues from the sale of company produced coal increased $8 million, or 1.8%,
to $431 million in the 2002 period from $423 million in the 2001 period. The
increase in company produced coal revenue was due mainly to an increase in the
average sales price per ton of company produced coal, offset, in part, by a
decrease in the tons sold. The average sales price per ton of company produced
coal increased 8.9% to $27.23 per ton for the 2002 period from $24.99 per ton
for the 2001 period. The increase in average sales price was due primarily to
the higher prices negotiated in a more favorable coal market in the last quarter
of 2001. Sales volumes of company produced coal were 15.8 million tons in the
2002 period, compared to 16.9 million tons in the 2001 period. Decreased sales
volumes were due primarily to lower demand for coal in the three months ended
September 30, 2002. Demand was weak primarily due to the continued sluggish U.
S. economy and the lingering effect of higher than normal customer inventory
levels as a result of the very mild 2001 winter. The decrease in tons sold was
also due to the deferral of shipments by some of our customers from the third
quarter of 2002 and reduced volumes from requirement contracts
Freight revenue, from both outside and related parties, decreased 12.4% to $32
million for the 2002 period from $36 million in the 2001 period. Freight revenue
is based on weight of coal shipped, negotiated freight rates and method of
transportation (e.g., rail, barge or truck) used for the customers to which
CONSOL Energy contractually provides transportation services. Freight revenue is
the amount billed to customers for transportation costs incurred.
26
Other income, which consists of interest income, gain or loss on the disposition
of assets, equity in earnings of affiliates, service income, royalty income,
rental income and miscellaneous income, decreased $5 million, or 38.3%, to $8
million in the 2002 period from $13 million in the 2001 period. Equity in
earnings of affiliates decreased $4 million in the 2002 period due to the
purchase on August 22, 2001 of the remaining 50% interest in Pocahontas Gas
Partnership and the remaining 25% interest in the Cardinal States Gathering
Company that we did not own. As a result of the acquisition, CONSOL Energy owns
100% of these entities and now accounts for them as fully consolidated
subsidiaries. Before the acquisition, CONSOL Energy accounted for these
companies on the equity method. The decrease in equity in earnings of affiliates
was also due to higher losses at our Line Creek Joint Venture in Canada in the
2002 period compared to the 2001 period. The decrease in other income was
offset, in part, by a higher gain on sale of assets in the 2002 period. The gain
on sale of assets principally relates to the sale of certain in- place coal
reserves. CONSOL Energy continually manages its coal reserves and from
time-to-time sells non-strategic reserves.
Costs
Cost of Goods Sold and Other Operating Charges increased $38 million, or 9.7%,
to $427 million in the 2002 period compared to $389 million in the 2001 period.
Cost of goods sold for company produced coal was $329 million in the 2002
period, an increase of $7 million, or 2.4%, from $322 million in the 2001
period. This is due primarily to a 9.6% increase in the cost per ton sold of
company produced coal, offset, in part, by a 6.5% decrease in the volume of
company produced coal sold. Increased costs are due mainly to increased labor
and related benefit per ton costs and increased costs related to other post
employment benefits.
Charges for closed and idle mine costs have increased $19 million, or 207.1%, to
$28 million in the 2002 period from $9 million in the 2001 period. The increase
is primarily due to $16 million related to locations that were closed or idled
during all or a portion of the 2002 period that were operated during the 2001
period. These locations include Shoemaker, Dilworth, Rend Lake, Humphrey,
Mahoning Valley, McElroy, Meigs #2, Meigs #31 and Muskingum. Many of these
locations were idled during the 2002 period in order to reduce planned
production to match anticipated demand for coal. Cost of goods sold and other
charges also increased $1 million primarily due to additional workers
compensation costs in the state of West Virginia.
Gas operations cost of goods sold increased 8.9% to $17 million in the 2002
period from $15 million in the 2001 period. The increase of $2 million was due
mainly to a 47.9% increase in volume sold offset, in part, by a 26.3% decrease
in the average cost per million British thermal units sold. This increase in
volume is related to the acquisition of the remaining 50% interest in Pocahontas
Gas Partnership on August 22, 2001. The average cost per million British thermal
units sold was $1.45 in the 2002 period compared to $1.97 in the 2001 period.
The decrease in cost was due mainly to a decrease in the cost of gob well
drilling. Gob wells are drilled in previously mined areas of underground coal
mines.
Miscellaneous cost of goods sold and other operating charges also increased $9
million, or 111.8%, to $18 million in the 2002 period compared to $9 million in
the 2001 period. The increase is primarily due to a $4 million increase in
litigation accruals in the 2002 period
27
compared to the 2001 period. The increase is also due to increased bank fees of
$2 million related to the renegotiation of our revolving credit facility. The
new facility replaces the previous agreement, which expired on September 20,
2002 and allows for an aggregate of $485 million of commercial paper and letters
of credit to be issued. The increase was also due to $1 million of salary
severance costs related to operations personnel reduction in work force program
that was implemented in the three months ended September 30, 2002.
Freight expense decreased 12.4% to $32 million in the 2002 period from $36
million in the 2001 period. Freight expense is based on weight of coal shipped,
negotiated freight rates and method of transportation (e.g., rail, barge or
truck) used for the customers that CONSOL Energy contractually provides
transportation. Freight expense is billed to customers and the revenue from such
billings equals the transportation expense.
Selling, general and administrative expenses increased 7.2% to $16 million in
the 2002 period compared to $15 million in the 2001 period. The increase of $1
million was primarily due to increased wages, salaries and other costs related
to executive severance and increased medical costs. The increase is also due to
an increase in software licensing and other fees related to the conversion to a
new integrated information technology system provided by SAP AG to support
business processes. The system will be implemented in stages over three
years at a total estimated cost, a portion of which is to be capitalized, of $53
million. These increases were offset, in part, by a reduction in commissions
paid on coal sales. The reduction was primarily due to the reduced sales
volumes.
Depreciation, depletion and amortization expense increased $6 million, or 11.3%,
to $65 million in the 2002 period compared to $59 million in the 2001 period.
The increase was primarily due to the August 22, 2001 acquisition of the
remaining 50% interest in Pocahontas Gas Partnership and the remaining 25%
interest in the Cardinal States Gathering Company. In the 2002 period, these
entities are reported as fully consolidated. In the 2001 period, these entities
were reported on an equity basis. Depreciation also increased in the 2002 period
due to more assets being placed in service compared to the 2001 period. These
increases were offset, in part, by lower financial depletion related to the
reduced production levels in the 2002 period compared to the 2001 period.
Interest expense increased by $4 million, or 42.7%, to $12 million for the 2002
period compared to $8 million for the 2001 period. The increase was due
primarily to a $5 million increase in interest expense related to the March 7,
2002, issuance of $250 million of 7.875% Notes due in 2012. The interest on the
notes is payable March 1 and September 1 of each year commencing September 1,
2002. The increase in interest expense was also due to an increase of $210
million in the average outstanding balance of commercial paper. The average
commercial paper balance was $319 million in the quarter ended September 30,
2002 compared to the average outstanding balance of $108 million in the quarter
ended September 30, 2001. The increase in the average commercial paper balance
was partially offset by a decrease of 1.8% per annum in the average interest
rate on commercial paper in the 2002 period compared to the 2001 period. The
increase in interest expense was also offset, in part, by scheduled payments of
long-term debt, resulting in a savings of $1 million in interest expense
attributable to that debt.
Taxes other than income decreased 10.3% to $38 million for the 2002 period
compared to $42 million for the 2001 period. The decrease of $4 million was due
primarily to decreased excise
28
taxes, severance taxes and reclamation taxes. These taxes are related to
production and therefore have decreased in the 2002 period compared to the 2001
period due to lower production. Payroll taxes also decreased primarily due to
lower employee counts as a result of several mines being idled during the 2002
period.
CONSOL Energy is no longer required to pay certain excise taxes on export coal
sales. We have filed claims with the Internal Revenue Service seeking refunds
for these excise taxes that were determined to be unconstitutional and were paid
during the period 1991 through 1999. In each of the 2002 and 2001 periods, we
recognized $1 million of interest income related to these claims.
Income Taxes
Income taxes were a $35 million benefit in the 2002 period compared to a $2
million benefit in the 2001 period. The increased benefit of $33 million was due
mainly to the $28 million reduction in pre-tax income without a comparable
reduction in percentage depletion tax benefits. CONSOL Energy estimates the
effective tax rate expected to be applicable for the full fiscal year. Our
effective tax rate is sensitive to changes in annual profitability and
percentage depletion.
Nine Months Ended September 30, 2002 Compared with Nine Months
Ended September 30, 2001
Net Income
CONSOL Energy's net income was $8 million for the nine months ended September
30, 2002, compared to $139 million for the nine months ended September 30, 2001.
Net income for the nine months ended September 30, 2001 includes $125 million of
pre-tax income recognized related to the export sales excise tax resolution. The
decrease in net income from the nine months ended September 30, 2001 was also
due to reduced revenues from sales of coal, offset, in part, by reduced cost of
goods sold and other charges. Sales revenue from coal was lower in the year to
date 2002 period compared to the year to date 2001 period primarily due to a
14.7% reduction in sales volumes of company produced coal. The reductions in the
cost of goods sold and other charges were also due primarily to the reduced
volume of coal sold. These decreases in earnings were offset, in part, by income
tax benefits recognized in the nine months ended September 30, 2002, compared to
tax expense recognized in the nine months ended September 30, 2001. The income
tax benefit was due mainly to a pre-tax loss for the year to date 2002 period
compared to pre-tax income in the year to date 2001 period without a comparable
reduction in percentage depletion tax benefits. Income taxes were also reduced
due to adjusting the provision for income taxes at the time the returns are
filed. These adjustments decreased income tax expense by $1 million in the year
to date 2002 period and $1 million for the year to date 2001 period. CONSOL
Energy received a $2 million federal income tax benefit from a final agreement
resolving disputed federal income tax items for the years 1995 to 1997 that also
reduced income taxes in the year to date 2002 period.
29
Revenue
Sales decreased $122 million, or 7.5%, to $1,495 million for the year to date
2002 period from $1,617 million for the year to date 2001 period.
Revenues from the sale of company produced coal decreased $110 million, or 8.0%,
to $1,272 million in the year to date 2002 period from $1,382 million in the
year to date 2001 period. The decrease in company produced coal revenue was due
mainly to a decrease in the tons sold. Company produced tons sold were 47.6
million tons in the year to date 2002 period, an 8.2 million ton, or 14.7%,
decrease from the year to date 2001 period. The decrease in tons sold was due
primarily to lower demand for coal in the nine months ended September 30, 2002.
Demand was weak primarily due to the continued sluggish U. S. economy, and the
lingering effect of higher than normal customer inventory levels as a result of
the very mild 2001 winter. The decrease in tons sold was also due to the
deferral of shipments by our customers during the nine month period to later
periods and reduced volumes from requirement contracts. Although sales volumes
have declined from the year to date 2001 period, the average sales price per ton
of company produced coal sold increased 7.8% to $26.75 per ton for the year to
date 2002 period from $24.81 per ton for the year to date 2001 period. The
increase in average sales price reflects the higher prices negotiated in a more
favorable coal market during the last three months of 2001.
Revenues from the sale of industrial supplies decreased $18 million, or 26.8%,
to $49 million in the year to date 2002 period from $67 million in the year to
date 2001 period primarily due to reduced sales volumes. During the fiscal year
ended June 30, 2001, the physical assets, inventory and operations associated
with 18 industrial and store management sites of Fairmont Supply Company were
sold. Fairmont Supply continues to operate 14 service centers.
These decreases in revenues were partially offset by increased revenues from the
sale of coalbed methane gas. Revenues from the sale of gas increased 2.3%, or $3
million, to $101 million in the year to date 2002 period compared to $98 million
in the year to date 2001 period. The increase was primarily due to higher
volumes of gas sold as a result of the August 22, 2001 acquisition of the
remaining 50% interest in Pocahontas Gas Partnership. Sales volumes were 34.5
billion cubic feet in the year to date 2002 period, a 60.1%, or 12.9 billion
cubic feet increase from the year to date 2001 period. The increase in sales
volumes was offset, in part, by lower average sales prices in the year to date
2002 period. The average sales price was $3.00 per million British thermal units
for the year to date 2002 period, a $1.64, or 35.3%, decrease compared to $4.64
per million British thermal units for the year to date 2001 period. The decrease
in average sales price was primarily due to reduced demand for gas in the
industrial sector and lower demand for gas during the winter heating season that
resulted in high levels of gas in storage.
Revenues from the sale of purchased coal increased by $4 million, or 7.3%, to
$61 million in the year to date 2002 period from $57 million in the year to date
2001 period. The average sales price per ton of purchased coal increased 21.7%
to $33.56 per ton for the year to date 2002 period from $27.58 per ton for the
year to date 2001 period. The increase in sales price per ton of purchased coal
in the 2002 period reflects higher prices negotiated in a more favorable coal
market during the last three months of 2001. Sales volumes decreased 0.3 million
tons, or 11.8%, to 1.8 million tons in the year to date 2002 period compared to
2.1 million tons in the year to date 2001 period.
30
Freight revenue, outside and related party, decreased $23 million, or 18.0%, to
$102 million for the year to date 2002 period from $125 million in the year to
date 2001 period. Freight revenue is based on weight of coal shipped, negotiated
freight rates and method of transportation (e.g., rail, barge or truck) used for
the customers to which CONSOL Energy contractually provides transportation
services. Freight revenue is the amount billed to customers for transportation
costs incurred.
Other income, which consists of interest income, gain or loss on the disposition
of assets, equity in earnings of affiliates, service income, royalty income,
rental income and miscellaneous income, was $32 million in the year to date 2002
period compared to $46 million in the year to date 2001 period. The decrease of
$14 million, or 31.0%, was primarily due to the reduction in equity in earnings
of affiliates. A reduction of $17 million in equity in earnings of affiliates
was primarily due to the August 22, 2001 purchase by CONSOL Energy of the 50%
interest in Pocahontas Gas Partnership and the 25% interest in Cardinal States
Gathering Company that CONSOL Energy did not own. As a result of the
acquisition, CONSOL Energy owns 100% of these entities and now accounts for them
as fully consolidated subsidiaries. Before the acquisition, CONSOL Energy
accounted for these companies using the equity method. These decreases in other
income were offset, in part, by a $7 million income adjustment related to a
settlement CONSOL Energy received, which occurred in the year to date 2002
period. The decrease in other income was also offset, in part, due to additional
gain on sale of assets in the year to date 2002 period. The gain on sale of
assets principally relates to the sale of certain in place coal reserves. CONSOL
Energy continually manages its coal reserves and from time-to-time sells
non-strategic reserves.
Costs
Cost of Goods Sold and Other Operating Charges decreased $62 million, or 5.1%,
to $1,152 million in the year to date 2002 period compared to $1,214 million in
the year to date 2001 period.
Cost of goods sold and other charges for company produced coal decreased $38
million, or 4.1%, to $900 million in the year to date 2002 period from $938
million in the year to date 2001 period. This was due primarily to a 14.7%
decrease in the volume of company produced coal sold. The decrease in tons sold
was due primarily to lower demand for coal in the nine months ended September
30, 2002. Demand was weak primarily due to the continued sluggish U. S. economy,
and the lingering effect of higher than normal customer inventory levels as a
result of the very mild 2001 winter. The decrease in tons sold was also due to
the deferral of shipments by our customers during the nine month period to later
periods and reduced volumes from requirement contracts. The reduced cost of
goods sold and other charges related to volumes sold was offset, in part, by a
12.4% increase in the cost per ton produced. The increase in cost per ton
produced is primarily due to increased labor and benefit costs. Increased labor
costs are primarily related to the decline in productivity at the mines in the
2002 period compared to the 2001 period as a result of the reduction in planned
production to match anticipated demand for coal. Increased benefit costs are
primarily due to increased medical costs.
31
Industrial supply cost of goods sold and other charges decreased $19 million, or
26.3%, to $54 million in the year to date 2002 period compared to $73 million in
the year to date 2001 period. The decrease was due to reduced sales. During the
fiscal year ended June 30, 2001, the physical assets and operations associated
with 18 industrial and store management sites of Fairmont Supply Company were
sold. Fairmont Supply continues to operate 14 service centers.
Coal property holding costs decreased $11 million, or 80.4%, to $2 million in
the year to date 2002 period compared to $13 million in the year to date 2001
period. The decrease was primarily due to leasehold surrenders that occurred in
the 2001 period.
These decreases in cost of goods sold and other charges were offset, in part, by
increased miscellaneous cost of goods sold and other operating charges of $1
million, or 2.6%, to $41 million in the year to date 2002 period compared to $40
million in the year to date 2001 period. The increase was due primarily to a $5
million increase in litigation accruals in the year to date 2002 period compared
to the 2001 period. Increased miscellaneous cost of goods sold and other charges
were also due to a $4 million increase in the year to date 2002 period related
to equipment removal costs at closed or idled mines. An additional $4 million of
expense in the 2002 period was due to the costs related to the termination of a
sales contract in the year to date 2001 period. A $2 million expense adjustment
was recognized in the year to date 2002 period to recognize an allowance for
doubtful accounts related to trade accounts receivable. Miscellaneous cost of
goods sold and other operating charges also increased $2 million due mainly to
increased bank fees related to the renegotiation of our revolving credit
facility. The new facility replaces the previous agreement, which expired on
September 20, 2002 and allows for $485 million of commercial paper principal and
letters of credit to be issued. These increases were offset, in part, by a $14
million charge in the year to date 2001 period related to incentive compensation
program expense. This plan is designed to increase compensation to eligible
employees when CONSOL Energy reaches predetermined earnings targets and the
employees reach predetermined performance targets. Expense for this plan was
reduced in the year to date 2002 period because performance targets for the nine
months ended September 30, 2002 were not achieved. Cost of goods sold and other
charges also included a $4 million expense adjustment in the year to date 2001
period related to a liability for the salaried investment plan.
Cost of goods sold and other charges for closed and idle mine costs have
increased $5 million, or 9.6%, to $59 million in the year to date 2002 period
from $54 million in the year to date 2001 period. The increase is primarily due
to $24 million related to locations that were closed or idled during a portion
of the 2002 period that were in operation during the 2001 period. This increase
was offset, in part, by $16 million of adjustments in reclamation liabilities
recognized in the year to date 2001 period as a result of updated engineering
survey adjustments for closed and idled locations.
Purchased coal cost of goods sold and other charges increased 7.6% to $59
million in the year to date 2002 period from $55 million in the year to date
2001 period. The $4 million increase was due mainly to an increase in the
average cost per ton purchased. The cost per ton of purchased coal was $32.49
per ton in the year to date 2002 period compared to $26.58 per ton in the year
to date 2001 period. Volumes of purchased coal sold decreased 0.3 million tons,
or 11.8%, to 1.8 million tons in the year to date 2002 from 2.1 million tons in
the year to date 2001 period.
32
Gas operations cost of goods sold increased $3 million, or 5.9%, to $47 million
in the year to date 2002 period from $44 million in the year to date 2001
period. This increase was due mainly to a 60.1% increase in the volume of gas
sold as a result of the August 22, 2001 acquisition of the remaining 50%
interest in Pocahontas Gas Partnership. The increase in volume was offset, in
part, by a 33.8% reduction in the average cost per million British thermal units
sold. Average cost per million British thermal units was $1.37 in the year to
date 2002 period compared to $2.07 per million British thermal units in the year
to date 2001 period. Cost per million British thermal units decreased in the
year to date 2002 period due mainly to a decrease in the cost of gob well
drilling and lower royalty expense. Gob wells are drilled in previously mined
areas of underground coal mines. Decreased royalty expense per million British
thermal units is related to the 35.3% decrease in average sales price in the
year to date 2002 period compared to the 2001 period.
Freight expense decreased $23 million, or 18.0%, to $102 million in the year to
date 2002 period from $125 million in the year to date 2001 period. Freight
expense is based on weight of coal shipped, negotiated freight rates and method
of transportation (e.g., rail, barge or truck) used for the customers that
CONSOL Energy contractually provides transportation. Freight expense is billed
to customers and the revenue from such billings equals the transportation
expense.
Selling, general and administrative expenses increased $6 million, or 11.8%, to
$50 million in the year to date 2002 period compared to $44 million in the year
to date 2001 period. An increase of $2 million was primarily due to expenses for
training, licensing fees and professional consulting related to the conversion
to a new integrated information technology system provided by SAP AG to support
business processes. The system will be implemented in stages over three
years at an estimated total cost, a portion of which is to be capitalized, of
$53 million. An increase of $1 million in the year to date 2002 period was for
professional consulting and training fees related to the review of strategic
planning processes. Costs also increased due to additional wages, salaries and
other costs related to executive severance and increased medical costs.
Depreciation, depletion and amortization expense increased $16 million, or 8.4%,
to $198 million in the year to date 2002 period compared to $182 million in the
year to date 2001 period. The increase was primarily due to the August 22, 2001
acquisition of the remaining 50% interest in Pocahontas Gas Partnership and the
remaining 25% interest in the Cardinal States Gathering Company. In the 2002
period, these entities are reported as fully consolidated. In the 2001 period,
these entities were reported on an equity basis. Depreciation also increased in
the 2002 period due to more assets being placed in service compared to the 2001
period. These increases were offset, in part, by lower financial depletion
related to the reduced production levels in the year to date 2002 period
compared to the year to date 2001 period.
Interest expense decreased $1 million, or 3.8%, to $34 million for the year to
date 2002 period compared to $35 million for the year to date 2001 period.
Interest expense decreased primarily due to a $22 million reduction in the
average levels of commercial paper outstanding during the year to date 2002
period compared to the year to date 2001 period, along with a decrease of 2.8%
per annum in average interest rates in the period to period comparison. This
resulted in a reduction of $8 million in interest expense related to commercial
paper in the year to date 2002 period compared to the year to date 2001 period.
Interest expense was also reduced $3 million due to the reduction of long term
debt through scheduled payments. Miscellaneous interest
33
expense was also reduced $2 million due mainly to an increase in capitalized
interest as a result of additional capital projects under construction in the
year to date 2002 period compared to the year to date 2001 period. These
reductions were offset, in part, by the increased interest expense related to
the March 7, the 2002 issuance of $250 million of 7.875% Notes due in 2012.
The interest on the notes is payable March 1 and September 1 of each year
commencing September 1, 2002. Interest expense related to the issuance of these
notes was $12 million in the year to date 2002 period.
Taxes other than income increased $9 million, or 7.3%, to $131 million for the
year to date 2002 period compared to $122 million for the year to date 2001
period. The increase was due primarily to increased black lung excise taxes,
real estate and personal property taxes and state reclamation fee taxes in the
year to date 2002 period. Due to certain black lung export excise taxes being
declared unconstitutional, $11 million of prior year accruals related to these
taxes, which were not paid and were no longer owed, were reversed in the year to
date 2001 period. Real estate and personal property taxes have increased
approximately $5 million in the year to date 2002 period compared to the year to
date 2001 period. The increase is primarily due to the additional property taxes
related to the properties owned by Windsor Coal Company, Southern Ohio Coal
Company, Central Ohio Coal Company, Pocahontas Gas Partnership, and Cardinal
States Gathering Company which were acquired in the prior year. State
reclamation fee taxes have also increased approximately $1 million due to an
increase in the rate per ton owed on tons produced in West Virginia. The rate in
the year to date 2002 period was $0.14 per ton compared to $0.03 per ton in the
2001 period. These increases were offset, in part, by a decrease in production
related taxes (blacklung excise taxes, severance taxes, and federal reclamation
fee taxes) due to the lower production in the year to date 2002 period compared
to the year to date 2001 period. Payroll taxes also decreased primarily due to
lower employee counts as a result of several mines being idled during the year
to date 2002 period.
CONSOL Energy is no longer required to pay certain excise taxes on export coal
sales. We have filed claims with the Internal Revenue Service seeking refunds
for these excise taxes that were determined to be unconstitutional and were paid
during the period 1991 through 1999. During the year to date 2001 period, we
recognized $93 million of pre-tax earnings net of other charges and $32 million
of interest income related to these claims. During the year to date 2002 period,
we recognized $2 million of interest income related to these claims.
Income Taxes
Income taxes were a benefit of $44 million in the year to date 2002 period
compared to expense of $51 million in the year to date 2001 period. The decrease
in tax expense was due mainly to a pre-tax loss of $36 million in the year to
date 2002 period compared to pre-tax income of $189 million in the year to date
2001 period without a comparable reduction in percentage depletion tax benefits.
CONSOL Energy estimates the effective tax rate expected to be applicable for the
full fiscal year. Our effective tax rate is sensitive to changes in annual
profitability and percentage depletion. Income taxes were also reduced due to
adjusting the provision for income taxes at the time the returns were filed.
These adjustments decreased income tax expense by $1 million in the year to date
2002 period and $1 million for the year to date 2001 period. In the year to date
2002 period, CONSOL Energy also received a $2 million federal income tax benefit
from a final agreement resolving disputed federal income tax items for the years
1995 to 1997 that reduced income taxes.
34
Liquidity and Capital Resources
CONSOL Energy generally has satisfied its working capital requirements and
funded its capital expenditures and debt service obligations from cash generated
from operations and proceeds from borrowings. A principal source of borrowing is
the issuance of commercial paper. At September 30, 2002, CONSOL Energy had an
aggregate principal amount of $297 million of commercial paper outstanding.
CONSOL Energy's commercial paper program has been backed by a Senior Revolving
Credit facility provided by bank syndicates. The most recent facility,
established in September 2002, provides for an aggregate of $485 million that
may be borrowed to pay commercial paper, letters of credit and other borrowings.
This agreement replaces a $400 million credit facility, which was to expire in
September 2002. The current agreement consists of a 364-day $218 million credit
facility which expires in September 2003, and a three year $267 million credit
facility which expires in September 2005. Interest is payable based, at our
option, upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR)
plus a spread, which is dependent on our credit rating. The agreement has
various covenants, including covenants that limit our ability to dispose of
assets and merge with another corporation. We are also required to maintain a
ratio of total consolidated indebtedness to twelve month trailing earnings
before interest, taxes, depreciation, depletion and amortization (EBITDA) of not
more than 3.25 to 1.0 measured quarterly. This ratio was 2.98 to 1.0 at
September 30, 2002. This covenant changes to 3.0 to 1.0 after December 31, 2002.
In addition, we are required to maintain a ratio of twelve month trailing EBITDA
to interest expense and amortization of debt of no less than 4.5 to1.0 measured
quarterly. This ratio was 6.10 to 1.0 at September 30, 2002. There were no
outstanding amounts under this facility at September 30, 2002. At November 5,
2002, this facility had $199 million of additional capacity remaining.
CONSOL Energy believes that cash generated from operations and its borrowing
capacity will be sufficient to meet its working capital requirements,
anticipated capital expenditures (other than major acquisitions), scheduled debt
payments and anticipated dividend payments. Nevertheless, the ability of CONSOL
Energy to satisfy its debt service obligations, to fund planned capital
expenditures or pay dividends will depend upon its future operating performance,
which will be affected by prevailing economic conditions in the coal and gas
industries and financial, business and other factors, some of which are beyond
CONSOL Energy's control.
On March 7, 2002, CONSOL Energy issued $250 million principal amount of 7.875%
notes due in 2012. The notes were issued at 99.174% of the principal amount and
CONSOL Energy received approximately $246 million of net proceeds. Interest on
the notes is payable March 1 and September 1 of each year commencing September
1, 2002. Payment of the principal and premium, if any, and interest on the notes
are guaranteed by several CONSOL Energy subsidiaries that incur or guarantee
certain indebtedness. The notes are senior unsecured obligations and will rank
equally with all other unsecured and unsubordinated indebtedness of the
guarantors. CONSOL Energy paid approximately $4 million for debt issuance costs
related to these notes. The debt issuance costs are being amortized using the
interest method. In connection with the issuance of these notes, CONSOL Energy
entered into a financial derivative contract that essentially fixed the
underlying treasury rate at 4.928%. This contract resulted in a net payment of
$1.3 million to CONSOL Energy. This receipt was treated as a
35
cash flow hedge and therefore, resulted in other comprehensive income of $0.8
million (net of $0.5 million deferred tax), which will be amortized to interest
income over the life of the notes using the interest method.
On July 17, 2002, one of CONSOL Energy's subsidiaries, CONSOL Energy Australia
Pty Limited (CEA), along with Maitland Main Collieries (MMC), entered into a
Syndicated Multi-Option Facility Agreement with Australia and New Zealand
Banking Group Limited to provide project finance for development of the Glennies
Creek Mine located in New South Wales, Australia. CEA and MMC have equal
ownership in the Glennies Creek Mine. Under the agreement, three borrowing
facilities were created.
The term loan facility allows CEA to borrow up to $16.5 million through March
31, 2004. The borrowed funds must be used for expenditures related to the
design, construction, and acquisition of longwall mining equipment and
infrastructure upgrades for the longwall mining equipment to enable the
extraction of coal using longwall mining methods at Glennies Creek Mine.
Interest is paid quarterly at an annual rate of LIBOR plus 1.75%. The principal
balance is payable March 31 and September 30 commencing March 31, 2006 and
ending March 31, 2009. At September 30, 2002, CEA was responsible for $14
million outstanding under this facility.
The mining unit facility allows CEA to borrow up to $3.2 million and is
available from March 31, 2004 through September 30, 2005. The borrowed funds
must be used for the design, construction, acquisition, and installation of an
extension to the longwall mining unit at Glennies Creek Mine and associated
infrastructure upgrades and related expenditures including the extension of
infrastructure and services, conveyor system, power and water supply,
ventilation and air supply and the development of roadways. Interest is paid
quarterly at an annual rate of LIBOR plus 1.75%. The principal balance is
payable March 31 and September 30 commencing March 31, 2006 and ending March 31,
2009.
The working capital facility allows CEA to borrow up to $5 million Australian
dollars (approximately $2.7 million US) and is available from July 17, 2002
through June 30, 2003. The Agreement provides for an annual extension of this
facility. The purpose of this facility is to finance the general working capital
requirements of the joint venture. Interest is payable based upon Australian
Bank Bill Rate (BBR) plus 1.5%. There were no outstanding amounts under this
facility at September 30, 2002.
As required under the agreement, CEA has entered into interest rate hedge
contracts and foreign currency swap agreements. The LIBOR and BBR exposure was
hedged by entering into interest rate swap contracts to provide the required
hedge protection of 95% of the forecasted principal outstanding until March 31,
2004. Thereafter, hedge protection of 75% of the forecasted principal
outstanding is required. The market value of these contracts decreased by $0.7
million as of September 30, 2002. These contracts were treated as cash flow
hedges and therefore, resulted in other comprehensive loss of $0.4 million (net
of $0.3 million deferred tax).
Foreign currency swap contracts were executed on July 10, 2002 to permit CEA to
purchase Australian dollars at a fixed exchange rate. CEA entered into these
swaps in order to minimize exposure to foreign exchange rate fluctuations.
Future swap contracts will be made in order to satisfy the requirement to
provide protection of the forecasted currency exposure for a rolling two-year
period. For accounting purposes, these contracts are not designated as hedges.
As a
36
result, a loss of $0.6 million was recorded in CONSOL Energy's consolidated
financial statements in the quarter ended September 30, 2002.
CONSOL Energy expects to reduce anticipated capital spending in the year ending
December 31, 2002 by more than $130 million from the $380 million previously
planned to be expended for the year ended December 31, 2002. Through September
30, 2002, CONSOL Energy spent $238 million for capital expenditures. Expected
capital expenditures will be reduced mainly through project delays and
utilization of leasing arrangements. The amount we expend throughout the
remainder of the year ending December 31, 2002, depends on a number of factors,
principally marketing and operational conditions.
CONSOL Energy frequently evaluates potential acquisitions. CONSOL Energy has
funded acquisitions primarily with cash generated from operations and a variety
of other sources, depending on the size of the transaction, including debt
financing. There can be no assurance that additional capital resources,
including debt financing, will be available to CONSOL Energy on terms which
CONSOL Energy finds acceptable, or at all.
Allegheny Energy, Inc., one of our largest customers which accounted for
approximately 14% of our total revenues in the six months ended December 31,
2001, announced that it and its subsidiaries, Allegheny Energy LLC and Allegheny
Generating Company are in technical default under their principal credit, after
Allegheny Energy declined to post additional collateral in favor of several
trading counterparties. These counterparties declared Allegheny Energy in
default under their respective trading agreements, which triggered cross-default
provisions under the credit agreements and other trading agreements. These
collateral calls followed the downgrading of Allegheny Energy's credit rating by
Moody's Investor Service. Allegheny Energy announced that it is in ongoing
discussions with its bank lenders, with a view toward obtaining required waivers
and additional funding. Allegheny Energy further announced that it believes that
its underlying businesses remain fundamentally sound, and that it will
ultimately be able to obtain the necessary liquidity to resolve its current
situation. To date, CONSOL Energy has been receiving payments from Allegheny
Energy, timely, in accordance with our agreements with Allegheny Energy and our
past practices with them.
Stockholders' Equity and Dividends
CONSOL Energy had stockholders' equity of $225 million at September 30, 2002,
and $272 million at December 31, 2001. The Board of Directors currently intends
to continue paying quarterly dividends on the common stock, although the
quarterly amount has been reduced to $0.14 per share. Dividend information for
the current fiscal year, to date, is as follows:
Declaration Date Amount Per Share Record Date Payment Date
---------------- ---------------- ----------- ------------
10/25/02 $0.14 11/08/02 11/29/02
07/25/02 $0.14 08/09/02 09/03/02
04/25/02 $0.28 05/10/02 05/30/02
01/24/02 $0.28 02/11/02 02/28/02
Under the CONSOL Energy's $485 million Senior Revolving Credit facility, payment
of dividends must be suspended in the event of a default under the facility.
37
Cash Flows
Net cash provided by operating activities was $179 million for the nine months
ended September 30, 2002 compared to $327 million for the nine months ended
September 30, 2001. The change in net cash provided by operating activities is
primarily due to the decreases in net income, inventories and accounts payable,
offset, in part by decreases in accounts and notes receivable. Net income for
the nine month period ended September 30, 2001 reflected the $125 million of
income related to the export sales excise tax resolution recognized in that
period. The decrease in net income from the nine months ended September 30, 2001
was also due to reduced revenues from sales of coal, offset, in part, by reduced
cost of goods sold and other charges. Sales revenue from coal was lower in the
year to date 2002 period compared to the year to date 2001 period primarily due
to a 14.7% reduction in sales volumes of company produced coal. The reductions
in the cost of goods sold and other charges were also due primarily to the
reduced volume of coal sold. These decreases in earnings were offset, in part,
by income tax benefits recognized in the nine months ended September 30, 2002,
compared to tax expense recognized in the nine months ended September 30, 2001.
The income tax benefit was due mainly to a pre-tax loss for the year to date
2002 period compared to pre-tax income in the year to date 2001 period without a
comparable reduction in percentage depletion tax benefits. Income taxes were
also reduced due to adjusting the provision for income taxes at the time the
returns are filed. These adjustments decreased income tax expense by $1 million
in the year to date 2002 period and $1 million for the year to date 2001 period.
CONSOL Energy received a $2 million federal income tax benefit from a final
agreement resolving disputed federal income tax items for the years 1995 to 1997
that also reduced income taxes in the year to date 2002 period. The decrease in
inventories reflects larger reductions in coal inventory levels in the 2002
period compared to the 2001 period. Accounts payable decreased due mainly to the
lower spending due to the existing market conditions. Accounts and notes
receivables included amounts attributable to anticipated refunds for excise
funds. Approximately $18 million of these receivables have been collected in the
2002 period and $20 million in the 2001 period.
Net cash used in investing activities was $293 million in the year to date 2002
period compared to net cash provided in investing activities of $6 million in
the year to date 2001 period. The change in net cash used in investing
activities reflects the $336 million of cash received in the acquisition of
Windsor Coal Company, Southern Ohio Coal Company and Central Ohio Coal Company
from American Electric Power during the 2001 period. This cash inflow was offset
in part by the $158 million expenditure for the acquisition of the remaining 50%
interest in the Pocahontas Gas Partnership and the remaining 25% interest in the
Cardinal States Gathering Company. Capital expenditures were $238 million in the
year to date 2002 period compared with $164 million in the year to date 2001
period. Capital expenditures increased due mainly to the expansion of the
McElroy preparation plant and an additional longwall at this mining complex.
These additions are being completed in preparation of increased shipments under
the sales contract with American Electric Power signed in July 2001. We also
acquired Windsor Coal Company, Southern Ohio Coal Company and Central Ohio Coal
Company from American Electric Power in July 2001. The mines these companies
control have been closed and the contract satisfied by coal mined from McElroy
and other CONSOL Energy mines. The change in net cash used in investing
activities was also due to a use of cash for investments in equity affiliates of
$58 million in the year to date 2002 period compared to $1 million in the year
to date 2001 period. The investments in the 2002 period primarily represent $29
million in payments made to a joint-venture with Allegheny Energy Supply
Company, LLC, an affiliate of one of
38
our largest coal customers, to build an 88-megawatt, gas-fired electric
generating facility. Investments also include payments made to our other equity
affiliates, including the Australian joint venture in Glennies Creek mine and
the Canadian joint venture in Line Creek mine, for capital and other
expenditures.
Net cash provided by financing activities was $110 million in the year to date
2002 period compared with net cash used in financing activities of $331 million
in the year to date 2001 period. The change in net cash provided by or used in
financing activities primarily reflects the net proceeds of approximately $246
million from the issuance on March 7, 2002, of 7.875% notes due 2012. Net cash
provided also increased in 2002 due to greater payments made to reduce the
outstanding principal balance of commercial paper in the 2001 period than in the
2002 period. Cash also increased by $11 million due to the reduction of the
quarterly dividend to $0.14 per share beginning with the quarter ended June 30,
2002 from the $0.28 per share dividend paid for each quarter in 2001. These
sources of cash were offset, in part, by scheduled payments of $66 million made
on unsecured notes that matured in 2002.
The following is a summary of our significant obligations at September 30, 2002
(in thousands):
Payments due
-----------------------------------------------
Within 1 2-3 4-5 After 5
Year Years Years Years
---- ----- ----- -----
Short-term Notes Payable $296,955 $ - $ - $ -
Long-term Debt 2,768 49,730 55,068 377,532
Capital Lease Obligations 5,314 4,348 - -
Operating Lease Obligations 6,602 11,270 9,653 8,254
-------- ------- ------- ---------
Total Obligations $311,639 $65,348 $64,721 $ 385,786
Additionally, we have long-term liabilities relating to other post employment
benefits, work-related injuries and illnesses, defined benefit pension plans,
mine reclamation and closure, and other long-term liability costs. We estimate
the payments, net of any applicable trust reimbursements, related to these items
at September 30, 2002 (in thousands) to be:
Payments due
---------------------------------------------
Within 1 Year 2-3 Years 4-5 Years
------------- --------- ---------
$235,337 $579,341 $533,366
Our determination of these long-term liabilities is calculated annually and is
based on several assumptions, including then prevailing conditions, which may
change from year to year. In any year, if our assumptions are inaccurate, we
could be required to expend greater amounts than anticipated. Moreover, in
particular, for periods after 2002 our estimates may change from the amounts
included in the table, and may change significantly, if our assumptions change
to reflect changing conditions.
These assumptions are discussed in the notes to our consolidated financial
statements and in our discussion of critical accounting policies included in our
Form 10-K for the transition period ended December 31, 2001, as amended, to
which we refer you.
39
Debt
At September 30, 2002, CONSOL Energy had total long-term debt of $493 million,
including the current portion of long-term debt of $8 million. Such long-term
debt consisted of:
. an aggregate principal amount of $248 million ($250 million of 7.875% notes
due in 2012, net of $2 million unamortized debt discount). The notes were
issued at 99.174% of the principal amount. Interest on the notes is payable
March 1 and September 1 of each year commencing September 1, 2002. Payment
of the principal and premium, if any, and interest on the notes are
guaranteed by several CONSOL Energy subsidiaries that incur or guarantee
certain indebtedness. The notes are senior unsecured obligations and will
rank equally with all other unsecured and unsubordinated indebtedness of
the guarantors,
. an aggregate principal amount of $90 million of unsecured notes which bear
interest at fixed rates ranging from 8.21% to 8.28% per annum and are due
at various dates in 2004 and 2007,
. an aggregate principal amount of $103 million of two series of industrial
revenue bonds which were issued in order to finance CONSOL Energy's
Baltimore port facility and bear interest at the rate of 6.50% per annum
and mature in 2010 and 2011,
. $28 million in advance royalty commitments with an average interest rate of
8.2% per annum, and
. $14 million aggregate principal amount of a term loan facility which allows
CONSOL Energy Australia Pty Limited to borrow up to $16.5 million through
March 31, 2004. The borrowed funds must be used for expenditures related to
the design, construction, and acquisition of longwall mining equipment and
infrastructure upgrades for the longwall mining equipment to enable the
extraction of coal using longwall mining methods at Glennies Creek Mine,
the joint venture owned 50% by CONSOL Energy Australia Pty Limited.
Interest is paid quarterly at a rate of LIBOR plus 1.75%. The principal
balance is payable March 31 and September 30 commencing March 31, 2006 and
ending March 31, 2009.
. an aggregate principal amount of $10 million of capital leases with an
average interest rate of 7.4% per annum.
At September 30, 2002, CONSOL Energy had an aggregate principal amount of $297
million of commercial paper outstanding that had maturities remaining ranging
from 1 to 14 days with interest at varying rates ranging from 2.10% per annum to
2.20% per annum.
Recent Accounting Pronouncements
On August 17, 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued and will be effective
for CONSOL Energy in the first quarter of the year ending December 31, 2003. The
new rule requires the fair value of a liability for an asset retirement
obligation to be recognized in the period in which it is incurred. When the
liability is initially recorded, a cost is capitalized by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. To settle the liability,
the obligation for the recorded amount is paid, and to the extent of the
difference in liability to cash paid, a gain or loss upon settlement is
incurred. Management is analyzing this requirement to determine its effect on
CONSOL Energy's financial statements.
40
In July 2001, Statement of Financial Accounting Standards No. 144, "Impairment
or Disposal of Long-Lived Assets," was issued and will be effective for CONSOL
Energy in the first quarter of the year ending December 31, 2003. The provisions
of this statement provide a single accounting model for impairment of long-lived
assets. No material effect from this adoption is anticipated.
In June, 2002, Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" (SFAS No. 146) was issued
and will be effective for CONSOL Energy for any exit or disposal activities that
are initiated after December 31, 2002. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities. The scope of SFAS No. 146 includes (1) costs
to terminate contracts that are not capital leases, (2) costs to consolidate
facilities or relocate employees, and (3) termination benefits provided to
employees who are involuntarily terminated under the terms of a one-term
benefits arrangements that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. No material effect from this adoption
is anticipated.
Forward-Looking Statements
CONSOL Energy is including the following cautionary statement in this Report on
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of CONSOL Energy. With the exception of
historical matters, the matters discussed in this Report on Form 10-Q are
forward-looking statements (as defined in Section 21E of the Exchange Act) that
involve risks and uncertainties that could cause actual results to differ
materially from projected results. In addition to other factors and matters
discussed elsewhere in this Report on Form 10-Q and, in CONSOL Energy's Form
10-K filed with the Securities and Exchange Commission on March 29, 2002, and
other periodic reports filed, these risks, uncertainties and contingencies
include, but are not limited to, the following: the success or failure of CONSOL
Energy's efforts to implement its business strategy; reliance on major customers
and long-term contracts; the effects of market demand and price on performance;
the ability to renew coal sales agreements upon expiration; the price of coal
and gas sold under any new sales agreements; fluctuating sales prices; contract
penalties; CONSOL Energy's ability to comply with laws or regulations requiring
that it obtain surety bonds for workers' compensation, reclamation and certain
other liabilities, actions of CONSOL Energy's competitors and, CONSOL Energy's
ability to respond to such actions; risks inherent in mining including
geological conditions and mine accidents; weather-related factors; results of
litigation; the effects of government regulation; the risk of work stoppages;
the risk of transportation disruptions that could impair CONSOL Energy's ability
to sell coal and gas; management's ability to correctly estimate and accrue for
contingent liabilities; and CONSOL Energy's ability to identify suitable
acquisition candidates and to successfully finance, consummate the acquisition
of, and integrate these candidates as part of its acquisition strategy.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONSOL Energy's interest expense is sensitive to changes in the general level of
interest rates in the United States. At September 30, 2002, CONSOL Energy had
outstanding $479 million aggregate principal amount of debt under fixed-rate
instruments, $14 million aggregate principal amount of debt under a
variable-rate instrument which an interest rate swap exchanged for a fixed-rate
instrument and $297 million aggregate principal amount of debt under its
variable-rate commercial paper program. CONSOL Energy's primary exposure to
market risk for changes in interest rates relates to its commercial paper
program. CONSOL Energy's commercial paper bore interest at an average rate of
2.22% per annum during the nine months ended September 30, 2002. A 100
basis-point increase in the average rate for CONSOL Energy's commercial paper
would have decreased CONSOL Energy's net income for the nine months ended
September 30, 2002, by approximately $1.4 million.
Almost all of CONSOL Energy's transactions are denominated in U.S. dollars and,
as a result, CONSOL Energy does not have material exposure to currency
exchange-rate risks.
Other than the financial derivative contract related to the issuance of $250
million principal amount of 7.875% notes due in 2012 and the interest rate swap
and foreign currency derivative entered in relation to CONSOL Energy Australia
Pty Limited's Syndicated Multi-Option Facility Agreement with Australia and New
Zealand Banking Group Limited, previously discussed in Item 2 of this 10-Q,
CONSOL Energy did not engage in any interest rate, foreign currency exchange
rate or commodity price hedging transactions.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation of the company's disclosure controls and procedures as
of a date within 90 days of the filing of this Report, the Chief Executive
Officer and Chief Financial Officer have concluded that such controls and
procedures are effective.
There were no significant changes in the company's internal controls or in other
factors that could significantly affect such controls subsequent to the date of
their evaluation.
42
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The following condensed consolidated financial statements of CONSOL Energy Inc.
and subsidiaries are included in this filing on the pages indicated:
Page
----
Consolidated Statements of Income (Loss) for the three months and nine months
ended September 30, 2002 and September 30, 2001 ............................................ 1
Consolidated Balance Sheets at September 30, 2002 and December 31, 2001 .................... 2
Consolidated Statements of Stockholders' Equity for the nine months ended September
30, 2002 ................................................................................... 4
Consolidated Statements of Cash Flows for the nine months ended September 30,
2002 and September 30, 2001 ................................................................ 5
Notes to Unaudited Consolidated Financial Statements ....................................... 6
(a) (2) Financial Statement Schedules:
43
No financial statement schedules required to be presented by CONSOL Energy.
(a) (3) Exhibits filed as part of this Report:
10.26 Three Year Credit Agreement, dated as of September 16, 2002, among
CONSOL Energy Inc., the banks, financial institutions, other
institutional lenders and issuers of letters of credit listed on
the signature pages thereof, Dresdner Bank AG, New York and Grand
Cayman Branches, PNC Bank, N.A., Salomon Smith Barney Inc. and
Citibank, N.A.
10.27 364-Day Credit Agreement, dated as of September 16, 2002, among
CONSOL Energy Inc., the banks, financial institutions and other
institutional lenders listed on the signature pages thereof,
Dresdner Bank AG, New York and Grand Cayman Branches, PNC Bank,
N.A., Salomon Smith Barney Inc. and Citibank, N.A.
10.28 Syndicated Multi-Option Facility Agreement, dated July 17, 2002,
among CONSOL Energy Australia Pty Limited and Maitland Main
Collieries Pty Limited, Borrowers, Glennies Creek Coal Management
Pty Ltd, Operator, Glennies Creek Coal Sales Pty Limited,
Marketing Company, CONSOL Energy Inc. and K-M Investment
Corporation, Sponsors, ANZ Investment Bank, Arranger, Australia
and New Zealand Banking Group Limited, Agent, Capital Facility
Provider and initial Participant, ANZ Capel Court Limited,
Security Trustee, and Glennies Creek Joint Venture Financing.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) (1) Reports on Form 8-K:
The Company filed a current report on Form 8-k with the Securities and
Exchange Commission on July 8, 2002. The following item was reported on
such Form 8-k:
1. Item 4: Change in the Registrant's Certifying Accountant.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOL ENERGY INC.
Date: November 13, 2002
By: /s/ William J. Lyons
---------------------------
William J. Lyons,
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
CERTIFICATIONS
I, J. Brett Harvey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CONSOL Energy
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
45
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 11, 2002
/s/ J. Brett Harvey
--------------------------------------------
J. Brett Harvey
President, Chief Executive Officer and Director
46
CERTIFICATIONS
I, William Lyons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CONSOL Energy
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other
47
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ William J. Lyons
----------------------------------------------
William J. Lyons
Senior Vice President and Chief Financial Officer
48
CONSOL ENERGY INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
10.26 Three Year Credit Agreement, dated as of September 16, 2002, among
CONSOL Energy Inc., the banks, financial institutions, other
institutional lenders and issuers of letters of credit listed on
the signature pages thereof, Dresdner Bank AG, New York and Grand
Cayman Branches, PNC Bank, N.A., Salomon Smith Barney Inc. and
Citibank, N.A.
10.27 364-Day Credit Agreement, dated as of September 16, 2002, among
CONSOL Energy Inc., the banks, financial institutions and other
institutional lenders listed on the signature pages thereof,
Dresdner Bank AG, New York and Grand Cayman Branches, PNC Bank,
N.A., Salomon Smith Barney Inc. and Citibank, N.A.
10.28 Syndicated Multi-Option Facility Agreement, dated July 17, 2002,
among CONSOL Energy Australia Pty Limited and Maitland Main
Collieries Pty Limited, Borrowers, Glennies Creek Coal Management
Pty Ltd, Operator, Glennies Creek Coal Sales Pty Limited,
Marketing Company, CONSOL Energy Inc. and K-M Investment
Corporation, Sponsors, ANZ Investment Bank, Arranger, Australia
and New Zealand Banking Group Limited, Agent, Capital Facility
Provider and initial Participant, ANZ Capel Court Limited,
Security Trustee, and Glennies Creek Joint Venture Financing.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
49